The Corner

Pakistan: More Trouble to Come

Via the Financial Times’ Lex column (subscription required):

Credit default swap spreads [on Pakistani debt] on Tuesday blew out to 3,084 basis points, according to Markit, up from 520 basis points in January. This is just the latest setback for Asif Ali Zardari, who took up the presidential reins after Pervez Musharraf stepped down in August. The Pakistan stock market, as represented by the Karachi 100 Index, has shed 46 per cent year to date in dollar terms, even though it barely traded in the weeks that global markets were trashed. Efforts to stem the falls have never risen above the level of talk. The currency, reflecting jitters about the external financial position, has slumped 22 per cent against the dollar this year. Pakistan’s position is clearly precarious. Political stability is fragile. High inflation exacerbates social tensions and makes the necessary macroeconomic reforms tougher to implement. Fiscal consolidation has petered out, as evidenced by a deficit of 7 per cent of gross domestic output. Largely due to oil, Pakistanis import roughly double what they export; unsurprisingly the current account deficit has ballooned out to some 9 per cent of GDP. Pakistan has deployed its foreign exchange reserves to try and prop up the rupee, and in doing so has almost halved its total kitty since the end of 2007 to just over $8bn at end September, or not much more than a couple of months’ import cover. Clearly it will be a struggle to roll over the upcoming $3bn of debt falling due – witness Mr Zardari’s pleas for a soft loan from Beijing. Alas, it will take a lot more than that for Pakistan to join the global cheer.

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