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State of Pakistan’s external sector as the economy enters choppy waters

The strong rupee policy stance adopted by the government has caused grave damage to the economy. From managed float regime, it had become a fixed rate regime which caused drop in exports and remittances. The continuation of high growth in imports led to a widening of current account deficit, and consequently to depletion in the country’s foreign exchange reserves. Pakistan is facing major challenges of growing public debt, stagnation in exports, widening of the current account deficit, overvaluation of the nominal and real effective exchange rates, slowing down of growth in credit to the private sector, expansion of the informal or underground economy and increase in income inequality, low tax to GDP ratio, circular debt and corruption. There is no doubt that Pakistan is fast running short of reserves which are hardly sufficient for three months of imports and that the government will have to earnestly concentrate on increasing exports, FDI and home remittances.

Foreign direct investment

Total private investment during July-October was up by 78% which is $886.4 million compared to $499.1 million of corresponding period last year while numbers of FDI have also seen some good improvement, an increase of 74 percent that is $939.7 million compared to $538.7 million of the same period last year. Although most of the FDI was a portfolio investment made in the stock market, it was still considered satisfying.

Remittances

Remittances play a major role in stabilizing Pakistan’s external sector, as they make up almost half the import bill and cover the deficit in the trade of goods account. Remittance inflows, however substantial, continue to fall. Worker remittances have shown some unexpected improvement, however, in the first 5 months of fiscal year 2018, declined by 2.57 percent from the same period in fiscal year 2017.

Exports

Pakistan’s exports have seen an improvement during July-Nov FY18 growing at 10.5 percent as compared to the decline of 3.1 percent in the comparable period last year. However, the share of exports in GDP nearly halved from 13 percent in fiscal year 2006 to a dismal 7.1 percent in fiscal year 2017. Exports fell annually by 2.5 percent on average from fiscal year 2013 to fiscal year 2017 due to lack of competitiveness and bad conditions for modernizing investment, leaving persistently low value addition to fetch low unit prices.

The recent devaluation will make textile imports costlier. Imported components are less than 10 percent in textile exportable products. Pakistan exports textile products worth $12.5 billion while the expected cost of imported cotton bales will be less than $1 billion. This means the devaluation will have a small impact on textile exports.

 

Imports

Imports climbed 21.1 percent to $24.06 billion in the July-November period. Imports are expected to continue to increase as growth spurs domestic demand that domestic production cannot meet. Energy is the largest import commodity and erosion in the currency exchange rate would push up energy prices which had already started increasing in the international market. The volume of the oil import payment was around $40-50 million. The costly imports of petroleum products will ultimately translate into a higher cost of exportable products.

Trade deficit widened 29 percent to $15.03 billion in the first five months of the current fiscal year of 2017/18 as import growth outnumbered a surge in exports. Trade deficit amounted to $11.7 billion in the corresponding period of FY2017 as exports stood at $8.17 billion, while imports were recorded at $19.86 billion. Though the government managed to raise $2.5 billion through issuance of dollar bonds, it has to invoke real growth in exports sector, which accounts for a mere seven percent of GDP. Currency depreciation is to instill confidence in the export sector. In November, trade deficit swelled 19.4 percent year-on-year to $2.92 billion as exports increased 12.4 percent to $1.97 billion, while imports rose 16.5 percent to $4.9 billion. Trade deficit shrank 3.9 percent in November over October as exports increased 4.6 percent, while imports decreased 0.63 percent.

Pakistan would continue to remain under the IMF’s post-program monitoring (PPM) until about 2023 for borrowing significantly higher than its quota. The threshold for Pakistan to move out of the PPM is estimated at 1.4 billion special drawing rights (SDRs) of the IMF that now stand around 4.3 billion SDRs.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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