RAWALPINDI, June 10: The government has drawn $3.4 billion from foreign exchange reserves since July 2007 to cover the widening current account deficit.

According to a World Bank report released on Tuesday, the current account deficit increased substantially in 2007 because of high fuel costs and continued to rise in 2008.

The report, titled “Global Development Finance 2008”, said that the drawing from the foreign exchange reserves to curb the current account deficit brought the merchandise import cover down to below three months’ level, as of May 2, 2008, -- an unsustainable trend. The fiscal deficit also widened substantially.

The World Bank report -- a review of global financial conditions facing developing countries -- said the output growth in Pakistan also slowed in 2007, moderating half a percentage point to 6.4 per cent.

Heightened political uncertainty in the lead-up to elections in early 2008 undermined overall confidence and led to weaker investment and private consumption outlays. Output was also disrupted by the growing power shortage.

“The deficit primarily reflects a rise in government’s borrowing from the domestic market. As foreign lending has largely halted, the privatisation programme has stalled and Pakistan’s spreads on international markets have risen,” the report said.

Higher food and fuel prices are adding to inflationary pressures. Consumer price inflation was up 17.2 per cent in April from 14.1 per cent in March -- the fastest pace in 25 years, the report said.

The report said that the GDP growth rate in South Asia was 8.2 per cent in 2007, moderating from a 25-year high of nine per cent in 2006. Slackening of growth was evident across the region, except in Afghanistan and Bhutan.

Regional growth reflects continued -- albeit softening -- strength in domestic activity, dampened by tighter credit conditions.

An easing in demand from key export markets contributed to waning export growth and widening the regional current account deficit.