The State Bank of Pakistan announced Monday that interest rate will remain unchanged at 12.5 percent for near term.

Despite signs of modest recovery, the State Bank policy statement was skeptical because the economy lacks the necessary infrastructure and sufficient macroeconomic stability to build on the momentum.

Policy statement which sent Pakistan’s leading market, Karachi Stock Exchange running for cover said that the worsening power crisis, and fiscal weaknesses, continue to impede sustainable recovery and comprehensive macroeconomic stability.

KSE-100 index plummeted from 9770 to 9,687 at the end of the session, shedding 183 points.

Overall trading remained on the lower side with only 79 million shares traded in the day. In the first session traders stayed on the selling spree avoiding buying that brought the index down to more than 150 points.

Today’s trading activity displays traders unease with the anticipated amendments in the post budget-trading pattern.

Traders dealt with the situation by readjusting their equity portfolios in accordance with the prescribed limits while the possible buyers holding back to trim down their holdings at available rates.

Trading activity is expected to remain low in the next session.

The State Bank of Pakistan (SBP) Monday said that foreign investment in Pakistan fell 22 percent to $1.73 billion in the first 10 months of the 2009/10 fiscal year but country’s current account deficit in the same fiscal period narrowed to a provisional $3.060 billion.

Foreign investment in Pakistan during the same period last year was $2.21 billion in the same period last year and the current account deficit was $8.982 billion.

Analysts point out that higher current transfers and receipt of logistical support payments from the US contribute to lowering deficit. The US embassy said this month it had released $656 million to Pakistan from its so-called coalition support fund for costs incurred last year in fighting Islamist militants, with $188 million transfered in late April 30 and $468 million in May.

The $188 million is reflected in the current account data for April and analysts said the remaining $468 million will be reflected in May’s data which should show a further narrowing of the deficit.

The trade deficit for the July to April period of the 2009/10 (July-June) fiscal year was $12.24 billion, compared with $14.22 billion in the same period last year.

Analysts said they expected the current account deficit to keep narrowing on falling international oil prices.

“We see a similar trend continuing in coming months with the recent decline in international oil prices further helping lessen pressure on the BOP (balance of payments),” Qureshi said.

Oil fell below $70 a barrel on Monday, its lowest in more than three months, extending a loss of nearly 17 percent over the past two weeks on fears over Europe’s debts, the weak euro and swollen US oil inventories.

Pakistan recorded a provisional current account deficit of $185 million in April compared with a provisional $40 million in March.

In a quarterly report on the economy released in March, the central bank lowered its forecast for the 2009/10 current account deficit to 3.2-3.8 percent of gross domestic product, from previous estimates of 3.7-4.7 percent.

An International Monetary Fund (IMF) emergency loan package of $7.6 billion agreed in November 2008 helped avert a balance of payments crisis and shore up reserves.

The IMF increased the loan to $11.3 billion in July and approved the fifth tranche of $1.13 billion on May 14.

But foreign investment in Pakistan continues to face decline. Out of total foreign investment, foreign direct investment fell 44.7 percent to $1.77 billion in the July to April period, from $3.20 billion in the year-ago period, the State Bank said.

Worsening security situation, with a Taliban insurgency in the country’s northwest, coupled with chronic power shortages, have kept risk averse investors out of the country .

There was a net outflow of $46.6 million of foreign portfolio investment in the first 10 months of this (July-June) fiscal year, compared with a net outflow of $992.6 million in the same period last year.

Authorities imposed a floor on the Karachi Stock Exchange benchmark index in August 2008 as political uncertainity and economic and security worries drained investor confidence.

The floor discouraged new investment and also led to a sharp outflow of funds, as foreign investors sold holdings in off-market trade.

Noting a 17 percent increase in remittances, State Bank of Pakistan Wednesday said that Non-Resident Pakistanis have send home nearly $5.7 billion between July 2009 to February 2010. During the same period in previous fiscal year, Pakistanis living abroad had sent $4.9 billion.

For economies like Pakistan, funds repatriated by non-residents to family and friends back home, provide the most tangible link between migration and development. But September 11attacks, it has become increasingly difficult for Pakistanis to get work visas which had resulted in negative growth of remittances.

Analysts believe that latest increase is due to strict regulation of foreign exchange market. Majority of the informal money transfer and forex firms have changed their business practice or disappeared.

Analysts point out that since remittances are unilateral transfers they do not create liabilities. And they usually come with advice—from migrants who have seen better—on how to best use them. Thus, remittances are not simply money, but value-added money.

NRPs sent $588.78 million in February 2009 compared to $641.32 of February 2010, reports Dollars Magazine. The inflow of remittances in July-February, 2010 period from UAE, USA, Saudi Arabia, GCC countries (including Bahrain, Kuwait, Qatar and Oman), UK and EU countries amounted to $1,317.17 million, $1,173.37 million, $1,148.86 million, $826.93 million, $596.26 million and $171.41 million respectively as compared to $1,035.55 million, $1,156.51 million, $962.30 million, $783.39 million, $344.08 million and $150.05 million respectively in the July-February, 2008-09 period.

Remittances received from Norway, Switzerland, Australia, Canada, Japan and other countries during the first eight months of the current fiscal year amounted to $550.65 million as against $486.34 million in the same period last year. The monthly average remittances for the July-February 2010 period comes out to $723.36 million as compared to $614.83 million during the same period of last fiscal year, registering an increase of 17.65 percent.

During February 2010 remittances from Saudi Arabia, UAE, USA, GCC countries (including Bahrain, Kuwait, Qatar and Oman), UK and EU countries amounted to $149.45 million, $136.88 million, $111.48 million, $89.21 million, $45.91 million and $13.48 million respectively as compared to $123.64 million, $166.62 million, $127.48 million, $93.09 million, $54.12 million and $18.31 million in February 2009. Remittances received from Norway, Switzerland, Australia, Canada, Japan and other countries during February 2010 amounted to $41.13 million compared with $58.04 million in the same month of last year.

The true size, including unrecorded formal and informal flows, is believed to be significantly larger. Remittances total at least three times official development assistance and are the largest source of external financing.

The State Bank of Pakistan will monitor all foreign exchange transactions with finer granularity to curb outgoing remittances and stabilize value of the Pakistan Rupee, reports on Thursday suggest.

Foreign exchange firms in Pakistan are currently required to report transactions above $5,000 at the close of business every day. Transactions below $5,000 were not the State Bank’s radar previously. However, going forward every transaction will have to report every day.

State Bank’s circular to the exchange companies today said, “Exchange companies would report, on daily basis, all transactions, regardless of amount, made by them on account of sales and purchased over the counter, besides daily reporting of outward remittances.”

Exchange firms are also required to submit daily information about their “contract” transactions of sale and purchase with other exchange firms and authorized dealers. The central bank has also asked the exchange companies that daily statement of FYC cash sales/purchase should reach SBP the same day, latest by 7 pm, as per proper procedure described by the State Bank.

SBP has warned the exchange companies that any delay in reporting will be dealt strictly under related rules and regulations. In another move, the SBP has also imposed condition of producing CNIC and submitting a copy at the time of buying and selling of even one dollar at any exchange company, and now exchange companies would report to SBP with CNIC numbers. Sources said that SBP has taken these steps after continued deprecation of rupee against dollar in the wake of the rising smuggling of dollars to the Afghanistan.

“The smuggling is being made through Chaman and Peshawar border to Afghanistan nowadays, which has created some shortage of dollars in the domestic market”, they said. However, they said, steps taken by the central bank would result in negative impact on the currency market, and people would move to black market. Despite SBP’s actions, the rupee is being depreciated against dollar, and on Wednesday it was being traded at Rs 86.60 per dollar in the open market, they said.

A briefing session at the Association of Builders and Developers (ABAD) on “Housing Finance”, today told that to address the shortage of affordable housing units State Bank Of Pakistan (SBP) has planned a long-term finance facilitation program.

Mortgage Refinancing Company (MRC) will be established with the initial investment provided by International Finance Corporation (IFC) of the World Bank and will be controlled by SBP. 20% of the initial investment would be provided by the government.

Director Infrastructure and Housing Finance Department, Mr.Rizwan Pesnani, of State Bank of Pakistan (SBP) said , “The MRC is being set up to build up the confidence of banks and financial institutions.”

He further added that the company would be made functional during the current year as its business plan had already been finalized. He said that the authority had to take positive measures for the proper implementation of recovery ordinance, which had caused the banks to commence disbursement of long term loans for housing sector fully, due to its absurd enforcement. MRC is to facilitate the masses at maximum, he said.

Syed Farhan Fasihuddin, Manager for Housing Finance Advisory Services at IFC, said that SBP and IFC have been working since 2005 for the development of MRC, moreover, MRC would help capital market, which would be launched latest by 2011. He said that in order to bring liquidity in the sector private commercial banks need to be trained for mortgage lending.

He mentioned that mortgage to GDP ratio of Pakistan is 0.7% presently, which is needed to be enhanced. He stated that it costs about eight times of the monthly income of a common person to construct a house.

Zaigham Rizvi, Consultant World Bank on Housing Finance in South Asia, said that WB has played a vital role in creating awareness regarding housing finance in the region. He informed, that newly established South Asia Housing Finance Forum portal,will be of great help in finding unique approaches to cater to the demands of the population. He added, the House Building Finance Corporation (HBFC) disbursed only Rs 700 million in 2009 and suggested the body of Abad to set up a research unit for establishing strong contacts with urban planners.

“So aesthetic and quality housing for the low-income group is a challenge that faces the whole of South Asia including Pakistan where builders need to meet the existing shortage of 8.8 million units,” he said.

Engr. Farooq-uz-Zaman, chairman Abad, said “while our annual demand of housing is 1.5 million we are constructing only 0.6 million.”

He further said, that the population residing in cities will be 65% by 2030, so the prices of houses should be catered down for the rising demand of population.

He said, “we have to transport the connection lines from the grid stations for our projects to that area even if it is 10 km away. And all this cost in borne by us, so we ultimately have to pass this cost to the buyer.”

The State Bank of Pakistan Saturday announced a cautious monetary policy, maintaining the interest rate to the current level of 12.5 percent because of concerns about remaining inflation pressures, the fiscal slippage in the second quarter, and the availability of external financing.

Addressing a press conference State Bank of Pakistan Governor Salim Raza said inflation rate was reduced at 10.3 percent during the first quarter of current fiscal year.

SBP officials tell us the risks of inflationary pressures due to higher oil prices and electricity tariff adjustments and the high domestic financing needs of the government were the key factor guiding current policy. It is apparent that State Bank has “balanced its desire for a more forceful support of the fragile recovery with its concerns about external stability and liquidity pressures arising from the government’s large domestic financing needs,” say an official privy to the decision making process.

International economists believe that remaining inflation pressures and increased domestic financing of the public sector prevent the SBP from easing monetary policy to support growth.

Governor Salim Raza today said the inflation rate was reduced at 10.3 percent during the first quarter of current fiscal year and inflationary pressure is there due to the increase in commodity prices in international market.

State Bank projects inflation to remain 11 to 12 percent this year – substantially lower that 21 percent that country faced last year.

According to IMF, concerns about low economic activity, weak private credit demand, and lower y-o-y headline inflation point in the direction of an easing of the monetary stance. The SBP proceeded with a reduction of the policy interest rate of 50 bps in November. Staff would have given greater weight to inflation risks and preferred a more cautious stance.

The SBP discount rate was lowered from 14 percent to 13 percent in August, and to 12.5 percent in November, but real interest rates remained positive. The rate cuts were limited because of concerns about remaining inflation pressures, the fiscal slippage in the first quarter, and the availability of external financing.

Governor Salim Raza said Pakistan’s forex reserves are at $15 billion. He said, “the government will have to borrow more loan from banks on account of budget deficit.”

While the government’s domestic financing needs have risen due to shortfalls in external financing, bank credit to the private sector has declined despite cuts in the policy interest rate. At the same time, the government’s high borrowing requirements have pushed T-bill rates from just below 11½ percent in mid-July to 12¼ percent in November. Government borrowing was supplemented by the issuance of government-guaranteed Term Finance Certificates (TFCs) to regularize the debt of the electricity sector companies (circular debt). Significant liquidity injections by the State Bank of Pakistan (SBP) in August–October were made to help meet the financing needs of the public sector and the seasonally higher demand for currency, while keeping the overnight repo rate within the policy corridor.