Pakistan’s impending 13-fold rise in sukuk sales in 2011 will go towards financing a budget deficit expected to range anywhere between 6-8% of GDP (versus the government’s 4% target) depending on how much oil prices rise.  And per a Bloomberg piece from earlier in the week, even that may not be enough to soak up the huge cash inflows waiting to be deployed by Islamic funds and banks.  “The government has relied too much on the conventional debt market without realizing how much liquidity is in the Shariah-compliant industry,” opined Sajjad Anwar, one fund manager.  Yet as The Economist points out, there is very little happening on either the fiscal or monetary front to suggest that Pakistan’s economy is not in fact “slouching towards another financial crisis.”  Fiscally the situation looks as dour as ever: prime minister Yusuf Raza Gilani’s 180 on a short-lived 9 percent price increase in fuel gave his beleaguered PPP party a lifeline, but in the process made it look both spineless and shortsighted since the reversal “robbed the exchequer of 5 billion rupees ($58m) a month” and also further infuriated the IMF, essentially biting the hand that feeds it.  In the meantime donors have pledged just a fifth of what is needed, per estimates, to address this past summer’s flood devestation, while tax revenues remain one of the lightest in the world.  Against this backdrop inflation continues to spiral (average inflation rate is 15 percent over the past three fiscal years), tempered only by a hitherto robust rate of remittances.  Nevertheless Pakistan’s central bank increased its key policy rate to 14 percent in November, the third consecutive hike in six months due primarily to government borrowing from the State Bank of Pakistan which in turn obliges by printing new rupees, and will likely raise that by 50 basis points when it meets next on January 29th.  And many observers opine the spiral is destined to accelerate: current inflationary pressures in the agriculture sector, which accounts for roughly 21% of GDP, can be traced back to a PPP decision in 2008 to sharply raise the price it paid to farmers for wheat to encourage supply growth; “The bottom line is inflation is here to stay for at least the next two years,” said Sakib Sherani, a former senior economic adviser to the government.   Thus, against the backdrop of rising rates, inflation and fiscal uncertainty, it will be interesting to note the spread investors require for Pakistan’s sukuk offerings over that of say, Malaysia’s, the regional defacto benchmark (given in part its liquidity) which has rallied ever since Europe debt worries temporarily subsided and expectations grew of impending debt restructuring among certain state-owned firms in Dubai.  As Josh Brolin’s character from the Wall Street sequel would say, only “more” may be enough.

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