In the quarter ending December 31, the Central Bank of Pakistan reached milestone of increasing the external assets and decreasing the internal assets of banking system. In lending to the government of Pakistan, the Central Bank also complied with the process required under the Stand-by Agreement.

The government of Pakistan raised US$2 billion from the auction of Treasury Bills (T-Bills) in December and paid off the Central Bank’s loan.

It may be noted that instead of releasing the aid in January 2010, the IMF had send the fourth tranche of US$1.20 billion on December 28 and additional US$400 million were provided to cover the budget deficit.

The IMF aid helped the banking system to increase its foreign assets up to US$4 billion and the SBP has remained successful in achieving the prescribe targets.

Total addressable market for the sale of sovereign bond in Pakistan is estimated to be as high as Rs500 billion.  By launching new investment instrument Government hopes to attract the excess money from the market that is not finding any productive outlet.

Savings bond will be sold through the network of the Central Directorate of National Savings and will be traded in the capital market.

Because of the lack of investment opportunities, experts feel that the prospective share price per unit of the government bond will higher than its face value.

The administration of Karachi, Lahore and Islamabad stock exchanges and the Security Exchange Commission of Pakistan have already received the draft rules and have very short window for comments.

General Manager of the Karachi Stock Exchange Haroon Askari was quoted in Dawn saying these bonds can “change fundamentals of our marketplace”.

Government backed bond will be ‘deemed listed’, which means that it will avoid the arduous procedure of application for listing and public offer before making its way to the market.

Government officials say they are actively pursuing the move to meet Pakistan’s budgetary demands.

As recipient of IMF loan, Pakistan is prohibited from the State Bank borrowing beyond certain limits. The World Bank and the ADB have also pressured Pakistani government to introduce investment opportunities and raise resources from market at competitive rates.

If this bond is ‘deemed listed’ next week, it will qualify Pakistan for the last tranche of $200 million under the ADB Accelerated Economic Transformation Project (AETP). Pakistan has been assured that the amount would be disbursed as soon as the bond is introduced during the current month.

The present measure has been adopted in the wake of Pakistan rupee losing 53 paisa or 0.6 per cent of its value within 4 days against the dollar as banks began to buy US dollars in advance. Bankers anticipate a further decline in the rupee value as they start financing crude oil imports. Crude imports stood at $4 billion or more than 40 per cent of the overall petroleum imports of $9.5 billion in FY09.

If Pakistan does not get the fourth trance this month a steeper decline in the rupee value of rupees in anticipated in the last weeks of December.

Pakistani bankers also concerned that the year-end servicing of both sovereign and corporate foreign debts would keep the rupee under pressure.

Foreign debt servicing in October-December 2009 was estimated well above a billion dollars, the major share of which was paid in December. In July-September Pakistan spent $1.2 billion on foreign debt servicing despite a roll-over of $450 million.

In July 2008, the State Bank had decided to provide foreign exchange to banks for financing import of crude oil and petroleum products to keep the exchange rates stable amidst inconsistency  triggered by international financial crisis and recession. But it stopped providing foreign exchange for financing of import of furnace oil from February 2009 and for that of petroleum products from July.

Now it has stopped selling foreign exchange for crude oil as well—reportedly to meet one of the conditions of the IMF standby loan—thus restoring the pre-July 2008 arrangements wherein banks were responsible for arranging foreign exchange to finance imports of both crude oil and all petroleum products.

Between February 2009 and 10 December 2009, when banks started financing of furnace oil imports on their own, the rupee has lost 6.8 per cent of its value against the US unit. A senior State Bank official remarked. “This should remove fears that the shifting of financing of crude oil imports to banks would lead to a big depreciation in the rupee value,” He  also added  “The rupee might lose a bit but we neither foresee a major decline in its value nor a serious inconsistency in exchange rates.”

Bankers also dispel the possibility of a speculative attack on the rupee value saying the State Bank is yet to allow forward selling of foreign exchange to importers and thus the question of manipulating exchange rates does not arise. But they say the central bank may allow it sometime next year as the IMF is believed to have raised this issue during talks with SBP authorities

Pakistani bankers estimate this year’s crude imports around $3.5 billion if the global prices remain range-bound and local refineries’ output that declined eight per cent in July-November 2009 does not rebound quickly.(In July-October 2009 crude imports fell to a billion dollars from two billion dollars in a year-ago period due to reduced refineries’ production and lower international prices )

The banks in Pakistan need some $300 million per month to finance crude oil imports.  The rupee depreciated a bit immediately after last announcement and  it may lose some more value in next few weeks unless there are big inflows of foreign exchange.

After the talks between Pakistan and the IMF mission held in Dubai last month, the government is expecting $1.2 billion after the approval by the IMF board scheduled to meet on December 21-22.

But IMF’s Director of External Relations Department Caroline Atkinson has said discussions with Pakistan were in progress, implying that the Dubai talks were not final and that the release of the fourth trance of the $7.6 standby credit might be delayed.