ISLAMABAD, April 18: The ratio of Pakistan’s foreign exchange reserves to its short-term external debt is shrinking, said United Nations’ Economic and Social Survey of the Asia and Pacific 2007.

The report launched here on Wednesday said Pakistan and Thailand were the only countries in the Asia and Pacific region whose foreign exchange to external debt ratio was worsening.

This implies that the accumulation of short-term loans has outstripped the growth of foreign exchange reserves because of increase in oil prices, sluggish growth of exports, and weakening of dollar.

The report, which discusses the development challenges confronted by the countries in the region, says the conventional wisdom is that countries should have enough reserves to cover their short-term external debt.

This ratio has increased over 2005 levels in all countries, except in Pakistan and Thailand. In Pakistan’s case the ratio declined from 3.3 in 2005 to 2.8 in 2006. In India’s case this ratio has risen to 21.1.

On the issue of Pakistan’s economic vulnerability, the report said, Pakistan experienced some deterioration after the first quarter of 2005. The deterioration was chiefly caused by the oil price hike and the high oil import dependency, eroding current account balances and foreign reserves.

The oil price hike also pushed up the real exchange rate. Consumer price inflation rose from 2.9pc in 2003 to 8.4pc in 2006. Short-term capital inflows increased from $1.9 billion in 2004 to $4.1 billion in 2006, building up short-term debt and reducing foreign reserves in relation to that debt. A significant build-up of private credit also took place.

Mentioning growth prospects for Pakistan, the report says, they are fairly promising and a small increase to 7pc in 2007 is expected following a recovery in agriculture and improved performance of the manufacturing sector.

Pakistan’s economy grew by 6.6pc during FY2006 and has averaged 7.5pc for the past three years. The slowdown during last year has been attributed to extraordinary surge in oil prices, the devastation caused by the October 2005 earthquake and adverse weather conditions. Agriculture and large-scale manufacturing had both slowed.

The report recommended greater investment for developing human resources and physical infrastructure for sustaining the future growth rate between 7-8pc.

It also calls for continuation of reforms for sustaining the growth and poverty alleviation. Improvement in tax collection and resource mobilisation, has also been suggested to reduce massive budget deficit that has grown to 4.2pc of GDP.