UPDATE 1-IMF sees recovery for Pakistan, country eyes bonds

By Martin Dokoupil DUBAI, Nov 12 (Reuters) - Pakistan's economy is showing signs of recovery but risks remain, the International Monetary Fund said on Thursday, and the country said it was readying its first foray onto international debt markets since 2007. The IMF bailed out Pakistan in 2008 to avert a balance of payments crisis that, allied to budget and political concerns, had undermined investors' faith in a country central to U.S. efforts to confront al Qaeda and settle a volatile region. The Fund, which was reviewing the country's progress with Pakistani officials in the United Arab Emirates, said discussions would be completed shortly as Pakistan looks to keep funds flowing from its $11.3 billion aid deal. "While risks to the economic outlook remain, the early signs of recovery in some sectors, declining inflation, and the improved external position are encouraging," the multilateral lender said in a statement. The outcome of the talks has been flagged by Pakistani Finance Minister Shaukat Tarin, who told Reuters earlier on Thursday that the IMF had expressed concern about Pakistan's security situation and its impact on economic performance. "They were concerned how the security situation will affect performance of the country," said Tarin, in Dubai for a round of talks with IMF officials. "Our recovery, our stabilisation programme is pretty robust, I think they are very comfortable with whatever we are doing," he said. The Pakistani army is waging a massive offensive against Taliban militants strongholds in South Waziristan that has prompted a spate of bloody revenge attacks on urban targets. The country's poor tax collection and a sluggish donor aid were also a concern to the IMF, Tarin said. Pakistan's tax-to-GDP ratio of around 9 percent is one of the lowest in the world but Tarin said improved tax collection and some new taxes would up that to 10.6 pct this fiscal year. The country was kept afloat by a $7.6 billion IMF loan agreed last November. It was upped to $11.3 billion in July. Pakistan was also promised $5.7 billion in aid over two years at a donors conference in April, but only a fraction of the funds has arrived as donors demand Pakistan follow through on reforms. State Bank of Pakistan Governor Salim Raza said this week up to $2 billion of the pledged donor aid could arrive this fiscal year. DEBT ISSUES Tarin also said economic stabilisation, slowing inflation and falling current account and fiscal deficits had pushed the risk premium for investing in Pakistan down, allowing it to consider issues of Islamic bonds and Eurobonds. It could tap debt markets as early as the first or second quarter of 2010 with one or more issues, he said, with a decision by the end of 2009. "It could be both or either, because we are looking at both opportunities," Tarin said. "Anything less than half a billion dollars would not be worth our while. My own sense is anything between half a billion dollars to $1 billion should be right." Pakistan's five-year credit default swaps stood at 813 basis points on Thursday, well down from 3,509 points ahead of its IMF bailout in November. This compares with just over 1,000 basis points for Argentina, which has defaulted on its debt in the past. Pakistan last ventured into international markets in May 2007, when it sold $750 million worth of 10-year bonds in a deal that was seven times oversubscribed with demand of $3.5 billion. It has a wishlist of projects worth $30 billion it wants to see implemented over the next 10 years, including hydroelectric dams, roads and projects aimed at improving security in its violence-plagued northwest on the Afghan border. Keywords: PAKISTAN IMF/ ([e-mail], [phone], Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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