KARACHI - The improvement in liquidity has reflected in the sharp decline in KIBOR rates - the benchmark 6M KIBOR fell from 15.67pc in January 2009 to 12.44pc on 16 March. However, liquidity conditions in the market tightened again at the end of March with the government retiring PKR 100 billion of central bank debt in order to meet IMF programme targets. This was achieved by collecting income tax from corporations in March instead of April and by the withdrawal of deposits by public sector corporations, which led to the draining of PKR 100 billion of bank deposits. At the same time, the government has been borrowing heavily from the markets to finance its deficit. The T-bill auction schedule for Q2-2009 (April-June) targets PKR 350 billion, which is significantly higher than T-bill maturities during the period. This has raised fears of tighter liquidity conditions and banks have bid at much higher rates, forcing cut-off yields on the T-bills to rise by 100bps to 150bps over the prevailing market yield. Tighter liquidity conditions are also reflected in 6M KIBOR, which rose to 13.50pc as of 13 April. Banks have recovered from the liquidity stress of October 2008, helped by the reduction of the regulatory reserve requirement and deposit mobilisation. Bank deposits increased by PKR 193 billion (5.3pc) from October 2008 to March 2009, helping to reduce the advance-to-deposit ratio (ADR) to 79pc by end March from 84pc in October. According to an analytical report of Standard Chartered Bank, Pakistan suffered a massive 10.2pc terms-of-trade loss (the difference between export prices and import prices) in 2008 on account of the sharp increase in international commodity prices, particularly in oil prices. This led to a rapid deterioration in the countrys external position and forced the government to seek financial assistance from the IMF to stabilise the economy. Since then, the economy has shown signs of greater stability. Large fiscal and external deficits have been brought down to sustainable levels, helping to reduce inflation and build up FX reserves. The policy focus will now shift to reviving growth. We expect policy measures including monetary easing and fiscal stimulus to move the economy onto a higher growth trajectory. Report said that downside risks to the economy stem from the deteriorating security environment and headwinds from the turmoil in the global economy. The cost of the conflict in the border regions with Afghanistan - an estimated $35 billion over the past six years - is weighing on the economy, and the government has sought financial assistance from the international community. The US President Obamas pledge to support Pakistans economy through a $7.5 billion aid package over the next five years will provide a much-needed boost. The government will seek an additional $6 billion at the 'Friends of Pakistan forum on 17 April to support the economy and fund the war against Taliban and Al-Qaeda militants. The build-up of FX reserves has also revived confidence in the economy, reflected in the narrowing of the Pakistani Credit Default Swap (CDS) spread on the 5Y USD bond to 1,688bps on 7 April from 5,000bps in October 2008. The improvement in Pakistans public debt profile has opened the doors for the World Bank and the ADB to start lending to Pakistan again; these agencies had withheld committed loans since January 2008 due to the deterioration in the public debt position. The World Bank has committed to releasing $2 billion by June 2009, while the ADB has announced a $4.4b country assistance programme for 2009-13. These will provide a large direct boost to the economy - unlike the IMF standby loan, ADB and World Bank financing can be used to increase government spending on key infrastructure projects (power, roads, and irrigation). Report observed that success in achieving the targets outlined in the IMF programme has resulted in a period of economic consolidation and stability. The policy focus now needs to shift to supporting growth, as economic activity has slowed much more sharply than anticipated under the IMF economic stabilisation plan.