Building the forex reserves

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Pakistan will need over 4.5 billion dollars during the next financial year

From Shamim Ahmed Rizvi,
 Islamabad
June 04 - 10, 2001

With promised assistance from the World Bank, IMF and Asian Development Bank under project aid, poverty alleviation and growth facility programme and for balance of payment support etc. and likely investments of over 2 billion dollars by Chinese and other foreign investors specially in Petroleum sector, Pakistan may not face any serious problem in meeting its forex requirement during the next financial year.

To augment its forex reserves the government has initiated numerous measures with the objective of raising the present level of forex reserves to at least 5 billion on by the year 2000. The Chief Executive, Gen. Pervez Musharraf has directed all concerned to intensify efforts to enhance foreign exchange remittances by non-resident Pakistanis through official banking channels. Speaking at a bankers' meeting in Islamabad held to review various economic and financial issues, he reminded them that the gap between total remittances coming into Pakistan and the amount listed through the banks was too wide and needs to be bridged quickly. According to an estimate above 2 billion dollars were coming to Pakistan through unofficial channels while only 600 to 700 million flowed in through official channels. All means should be employed to raise the remittance to at least to 2 billion dollars through official route in a year's time.

Pakistan will need over 4.5 billion dollars during the next financial year to meet its trade deficit and debt servicing. About 3.5 billion dollars are expected in various forms of assistance and foreign investments. A minimum of 1 billion is required to come in the form of remittances from overseas Pakistanis through official channels to meet the gap. For building forex reserves by over 3 billion dollars by 2004 vigorous efforts are needed to raise exports and remittances. The Chief Executive also directed to make an all out efforts by all concerned to persuade Pakistani expatriates to invest their surplus money in Pakistan.

Foreign exchange remittances through the banks are gradually dwindling primarily due to the bankers' lethargy and apathy towards legitimate interests of the overseas Pakistanis. The tragedy is that despite tough competition with the clandestine 'hundi' system, our banks have failed to suitably respond to the challenge. No expatriate Pakistani would obviously like to put his family to hardships and humiliation at the banks in Pakistan through inordinate delays and technical wranglings. On the contrary, the 'hundi' operators deliver the money to the addressee at his residence like the Post Office money order. If the Government is really serious to encourage the overseas Pakistanis to send their remittances through the banking channel, it will have to goad the banks to vigorously respond to the challenge. Besides, there is also need to provide a comprehensive package of incentives to the overseas Pakistanis to allure them to invest in Pakistan as well as to make them remit their money through the banks. It is estimated that the expatriate Pakistanis have the financial ability to generate about a hundred billion dollars. It should not be difficult to tap these resources for debt retirement, if the financial institutions' credibility is re-established.

The situation on forex front may not cause a serious problem in the next financial year, but the budget deficit dilemma is not going to ease down. Pakistan has rightly decided to approach the IMF to get the agreed budgetary deficit target for the current as well as the next year rationalized. Since the country entered into a Standby Arrangement (SA) with the IMF in November last year, it has suffered a serious bout of drought. The spell is still continuing. Partly because of this and partly because of the stagnant state of the economy still continuing in the absence of any significant upswing in investment, revenue collection too has lagged behind. As a result a serious shortage resources has forced the government to drastically curtail its development budget for the current year to meet the budgetary deficit target fixed by the IMF. Even then it may not be possible for the government to meet the current year's budgetary deficit target of 5.2 per cent. On the advice of multilateral donors, Pakistan had started restructuring the public sector investment in mid-1980s ostensibly to encourage private sector investment.

This had then led to a sharp fall in public investment to 0.4 per cent of the GDP. But the private sector investment did not grow beyond 2.7 per cent of the GDP by the year 2000. So, in the absence of a ressonable level of public sector investment all these years and the continued reluctance of the local as well as foreign private capitalists to take up the slack in investment activity, not only has the overall growth remained very low during the last several years but, as a consequence, unemployment has also risen massively. To compound the problem, imports have gone up while exports have stagnated. On the other hand, despite massive efforts and all the reforms, the ability of the CBR to collect enough to meet the expanding budgetary needs without resort to deficit financing has declined sharply over these years. A vicious cycle, thus, seems to have set in, with resource constraints forcing the government to curtail expenditure and reduce public spending.

Here it would not be out of place to mention that in the past as much as 40 per cent of the public development budget used to be siphoned off by unscrupulous elements. This was one reason why the multilateral donors have been insisting that the government adhere strictly to the budgetary deficit target laid down by the IMF. However, by making this condition more Important than the overall growth and investment, the IMF seems to have added to the problems of Pakistan rather than help ease the situation. Budgetary leakages can be tackled with greater transparency, stricter accountability and by giving the press easier access to all kinds of information other than security sensitive ones. However, since the IMF has warned that stimulation through expansionary fiscal and monetary policies was not an option, that is, no expansion in budgetary deficits beyond the target fixed under the Fund's programme, the government is a quandary. One hopes, however, that Islamabad would succeed in its current efforts to persuade the Fund to ease up on the budgetary deficit conditionality for the next three years or so in order that both investment and overall growth rates are improved and the economy is able to generate enough resource to meet its expanding budgetary obligations.