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Banking

Pakistan: Debt default looms, domestic liquidity dries up

Farrukh Sabzwari, KASB Securities

"The banks have closed their credit lines to all brokers. I’m the largest broker in Pakistan but even my credit lines have been stalled. This is both a crisis of liquidity and a crisis of confidence"

Farrukh Sabzwari, KASB Securities

Cash-strapped Pakistan is trying every trick in the book to stave off a humiliating default on its mountain of foreign borrowings and inject some life into its moribund share markets. Mirroring the financial crisis elsewhere, the State Bank of Pakistan on October 16 moved to inject liquidity into the country’s financial system, cutting the cash reserve ratio – the amount banks are required to hold in reserve – by two percentage points, to 6%, and promising a further one percentage point cut by November 15. SBP governor Shamshad Akhtar promised the country’s embattled bankers that the move would immediately inject up to Rs180 billion ($2.2 billion) into the banking system, with a further Rs90 billion in capital to be freed up "at a later date".

The move was doubly welcome, as earlier in the week Pakistan’s leading bourse, the Karachi Stock Exchange, had announced that it would remove a self-imposed floor on the KSE index on October 27, heartening investors and traders at home and in the country’s key overseas institutional investment markets, notably the Gulf region and Japan.

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