BALANCE OF PAYMENTS STRATEGY

The aims of the balance of payments strategy were specifically stated in the Third Five Year Plan

By ASHRAF KHAN
Aug 22 - 28, 2005

The goal of the balance of payments strategy in a planned economy is to make the country economically viable and independent in the matter of foreign exchange requirements for financing its imports, developmental as well as non-developmental, as decided by national policy. Pakistan began its discourse to pursue that goal after independence through putting efforts to increase the country's foreign exchange earnings by stimulating exports of goods and services.

The aims of the balance of payments strategy were specifically stated in the Third Five Year Plan to prepare the economy for a gradual reduction in the need for foreign assistance and to move towards greater economic viability. This was to be achieved by increasing exports at a faster rate than GNP i.e. 9.5 percent per annum as against 6.5 percent during the third Five year Plan. Secondly, the strategy also stressed the need of intensifying import substitution efforts, particularly in capital goods and intermediate products. This was to be achieved by measures like revision of tariff policy, re-examination of the interest rates structure and the use of shadow prices in the appraisal of the major plan projects.

The actual implementation of the plan in this sector, however, showed that exports rose at the rate of about seven percent as against the target of over nine percent. In the composition of exports, however, there was a welcome change, the share of primary commodities declined and that of manufacturers increased. The percentage of the latter increased from 35 percent in 1964-65 to 50 percent in 1969-70. The factors responsible for this change were the Bonus Scheme and fiscal monetary measures, through which industrial production and exports were stimulated and domestic consumption discouraged.. Due to the lower rate of increase in export the foreign exchange earnings were four percent below the plan target. On the other hand imports declined by 12 percent below the plan target. This decline mainly in capital goods and industrial raw materials was bound to react adversely on the industrialization of the country. The main cause of reduction in the import of capital goods and raw materials was the reduction in the inflows of foreign assistance which was 22 percent below the target, the country's own foreign exchange earnings being four percent below the target. The 12 percent lower imports reduced the foreign exchange gap to Rs.11.57 billion as against 15.50 billion envisaged in the Third Plan.

Lack of skilled personnel, sluggish private enterprise, inability of the agriculture sector to take to new technology for various reasons, and natural calamities offsetting achievement were frequent.

Now the scenario has altogether changed. Exports were targeted to grow by 11.3 percent in 2004-05 - rising from $ 12.313 billion last year to $ 13.7 billion this year. Exports were up by 14.6 percent during the first nine months of the FY 2004-05 - rising to $ 10206.6 million from $ 8905.2 million in the same period last year, thereby registering an increase of $ 1301.4 million in absolute terms. One-half of the net increase in exports amounting to $ 650.7 million has come from the non-traditional export items (other exports) followed by 27.2 percent ($ 354.1 million) from other manufactures and 13.4 percent or $ 174.6 million from primary commodities exports, while textile manufactures contributed 9.4 percent ($ 122.0 million) towards additional export earnings.

Further disaggregation of exports revealed that primary commodities exports during the period (July-March) grew by 23.4 percent to $ 919.3 million. Within this group a significant rise was witnessed in the export of rice (30.4%) and raw cotton (171.4%) which together added $ 200 million in net addition to overall exports due mainly to substantial increase in the exports of their quantity (31.0% and 190.3 %, respectively). On the other hand, the export of fish & fish preparation declined by 15.4 percent or $ 17.8 million, owing to 24.4 percent fall in its quantity. The export of textile manufactures, covering 58.5 percent of total exports, registered a modest growth of 2.1 percent and stood at $ 5972.2 million. The more value-added items in this group such as knitwear, towels and made-up articles registered an impressive growth of 22.8 percent, 24.5 percent and 19.2 percent, respectively. In quantity terms, the exports of knitwear and towels were also up by 10.1 percent and 31.6 percent, respectively. Exports of cotton yarn and bedwear on the other hand registered a decline on account of a decline in quantity and unit values. Other manufactures exports with 19.0 percent share in total exports posted a healthy growth of 22.3 percent to $ 1943.8 million. Within this category, impressive growth was witnessed in the exports of petroleum products (90.2%), engineering goods (66.9%) and chemicals & pharmaceutical products (30.5%). Exports of carpets, leather tanned and leather manufactures also registered a substantial increase of 14.3 percent, 14.7 percent and 11.6 percent, respectively, owing to significant increases in their quantity with total contribution to $ 85.4 million in the overall export earnings. It is important to note that the increase in the value of exports was driven mainly by substantial rise in volume. Thus, with firming up of prices in the international market, exports are likely to rise further.

Pakistan lost $ 245.3 million on the export of major items during July-March 2004-05 due to lower export prices prevailing in the international market. Had the unit values of these exports remained at the last year's level the export growth would have been 17.4 percent instead of 14.6 percent as recorded in the first nine months of the current fiscal year