gains should not distract from pursuing reforms vigorously
SHABBIR H. KAZMI
Apr 01 - 07, 2002
Pakistan was able to record a historical overall
surplus of about US$ 1.2 billion on its balance of payments during
July-December 2001 period. This was despite the shock and aftermath of
September 11 event, synchronized global recession and high tension at
Indian borders. Although, the US-led war against terrorism created
significant uncertainty about Pakistan's economy, the country emerged
stronger. The sharp turnaround in domestic sentiments concerning the
external sector has been reflected by the appreciation of Pak rupee
and the unprecedented increase in foreign exchange reserves. Although,
the donor support to Pakistan figures prominently, the reverse capital
flight and stronger inflow of remittances also contributed
significantly towards this improvement.
Despite the impressive balance of payment
improvement, it is difficult to disentangle the temporary or
transitory factors from the structural shifts because a number of
underlying parameters changed in the post September 11 period. These
were: synchronized global recession, disruption in normal economic
activities, virtually no difference in the kerb and interbank exchange
rate, reduction in crude oil prices and halt in smuggling to
Afghanistan. The continuation of these trends in future will determine
the balance of payments outcome. Yet there are some structural shifts
which are visible. In addition to commitments for external grants and
concessional loans, Paris Club creditors have approved the relief on
debt servicing of about US$ one billion during the current fiscal
year. The increase in textile quota and reduction in tariff by the
European Union will lead to some modest improvement in exports.
While the setback in terms of revenue, exports and
to some extent, industrial production was significant, the mind-set
change in external sector allowed for an unprecedented surplus in the
current account. To be more specific, the sharp fall in imports
actually reduced trade deficit. Falling crude oil prices and reduction
in quantities of POL products imported helped in not only reducing
Pakistan's oil import bill but also allowed for higher import of
non-oil and non-food products into the country. Furthermore, the gain
in the external sector paved way to address the long-standing
structural distortions created by the parallel foreign exchange
Prudent macroeconomic management allowed for the
successful completion of the Standby Arrangement in September 2001.
This in turn helped Pakistan negotiate a Poverty Reduction and Growth
Facility (PRGF) with the IMF in November. This attainment of
macroeconomic stability and enforcement of fiscal and monetary
discipline allowed the country to absorb the shock of September 11
smoothly and with ease. The developments in the external sector and
Moody's upgradation of Pakistan's credit rating improved the outlook
for foreign direct and portfolio investment.
Despite its significance, the external debt is
entangled with a lot of confusion mainly due to: 1)
use of various definitions and technical terms; 2)
limited disclosure of information; and data revision and changes in
reporting formats. Consequently, even those familiar with the issue of
Pakistan's external debt, find it difficult to follow important
development in this area.
As of end-December 2001, Pakistan's total sovereign
external debt and liabilities (EDL) were US$ 38 billion — external
debt at US$ 33 billion and foreign exchange liabilities at US$ 5
billion. In terms of external debt, public and publicly guaranteed
debt amounted to US$ 28.9 billion. Commercial and IDB credit amounted
to US$ 600 million and US$ 300 million respectively. On the other
hand, private loans and credit amounted to US$ 2.3 billion. Another
component of external debt is IMF loans, amounted to US$ 1.9 billion.
The country also owes US$ 5 billion as foreign exchange liabilities.
These are different from external debt in the sense that repayments
are not structured by an set schedule; it is not generally solicited
and is primarily held by residents. Interestingly, the increase in
total EDL may not necessarily be due to borrowing alone. In fact,
since Pakistan borrows in multiple currencies, any appreciation in the
currency of the creditor would have an adverse impact on debt
With historical perspective, Pakistan has benefited
in the past from a number of debts rescheduling from Paris Club. The
first two rescheduling agreements, which were concluded in 1972 and
1974, were based on adhoc terms. The first rescheduling was the result
of payment difficulties following the separation of East Pakistan in
1971. Subsequently, the unprecedented increase in oil prices in 1974
compelled Pakistan to seek debt rescheduling. Pakistan requested
another rescheduling in 19981, following the second oil shock.
Following the acute balance of payments
difficulties after the nuclear detonations in May 1998, Pakistan again
approached the Paris Club in 1999. Since Pakistan was unable to build
its repayment capacity, another round of rescheduling was sought from
sovereign creditors in January 2001. The Paris Club agreed to
restructure debt worth about US$ 1.8 billion.
Although Pakistan successfully completed the IMF's
Standby Arrangement, the need for the third rescheduling in three
years was obvious by the September 2001. It was Pakistan's enhanced
international stature following September 11 that allowed for
extraordinary terms from Paris Club creditors.
In addition, the write off of US$ 1 billion of
bilateral debt from the US will also reduce the external debt burden.
This, together with the extraordinary increase in foreign exchange
reserve, would not only improve Pakistan's international liquidity
position, but also provide an opportunity to exit from IMF programme
after the completion of the current PRGF.
There is a need to further consolidate these gains.
Since multilateral debt cannot be rescheduled or re-profiled, non-concessional
loans from the World Bank, Asian Development Bank and IMF are being
substituted by new loans on soft terms. The government is also
refraining from contracting new commercial or short-term loans. The
government is also focusing more on retiring expensive short-term
The government plans to gradually curtail external
debt and liabilities. Although, this seems difficult to believe, the
current account surplus posted during July-December 2001 period and
substantial gains from recent developments in the external sector can
make this task within reach.
During this period Pakistan's external trade
suffered the most serious short-term setback in the shape of
imposition of War Risk Surcharge and reported cancellation of orders
for exports. While it is too early to assess the exact impact, as the
long-term benefits may outweigh the short-term losses. Pakistan is
also expected to benefit from the reconstruction and rebuilding of
In the above stated backdrop, Pakistan's trade
performance during the period was not disappointing. Pakistan's trade
deficit was US$ 417.6 million, showing an improvement of 54.7 per cent
over the same period of last year. Despite a fall of around half a per
cent in export earnings, the lower trade deficit was mainly due to a
9.6 per cent decline in imports. The ratio of exports to imports also
went up from 82.9 per cent in year 2000 to 91.4 per cent in year 2001.
Excluding POL import, which has been a continuous strain on Pakistan's
balance of payment position, the trade account registered a surplus of
over US$ 930 million.
Total exports were for US$ 4.458 billion. This fell
short of the target of US$ 5.05 billion for the half year. The
slowdown of economic activities across the globe, particularly in the
major markets of the US and EU posed immense challenge to Pakistan's
exports. The appreciation in the value of Pak rupee during the second
quarter also worked against the exporters.
Under these circumstances, maintaining the last
year's export level, with just a small decline of 0.4 per cent is
itself a significant achievement. Pakistan's major exports including
POL, leather, readymade garments, towels, bedware, surgical
instrument, footwear, cotton fabrics, and yarn were able to show
moderate to impressive quantitative increase over the corresponding
period of last year. However, unit prices continued to deteriorate
over the period resulting in an overall loss of US$ 182 million in
Quarterly analysis indicates that in second
quarter, export revenues declined by 2.5 per cent, against a growth of
1.8 per cent in first quarter. However the actual impact of the crisis
would not be known till the second half of the current fiscal year as
the industry was so far engaged to accomplish the export orders which
were already in the pipeline.
Export of textiles amounted to US$ 2.862 billion,
registering a 1.4 per cent improvement. Though higher quantitative
exports contributed additional earnings of over US$ 209 million, the
negative price effect of US$ 175.9 million reduced this gain to just
US$ 33.5 million. Export of cotton yarn at US$ 469.3 million was 7 per
cent lower compared to the same period last year. Bedware exports
showed a marked improvement in terms of both value and volume and
amounted to US$ 453.4 million. Readymade garments fetched US$ 433.3
million, registering a 5.2 per cent growth. A 28.5 per cent increase
in volume resulted in an enhanced earnings of US$ 117 million.
However, the advantage was lost by over 18 per cent fall in average
export price. POL exports, despite falling international prices,
registered a growth of nearly 14 per cent and earned US$ 98 million
mainly due to commencement of PARCO which exported 121.7 thousand
tonnes of motor gasoline.
Imports amounted to US$ 4.875 billion, registering
a 9.6 per cent decline over the corresponding period of last year.
Lower imports of food items and reduction in the POL import bill were
mainly responsible for this decline. Excluding POL, imports declined
by a very small margin of less than one per cent. Whereas non-food and
non-oil imports, showed a significant growth of around 6 per cent.
Import of machinery, except textile machinery has
been declining over the years, indicating an industrial stagnation and
poor investor confidence. In fact it declined by 7 per cent from US$
977 million to about US$ 909 million. However reflecting the
continuation of BMR drive textile sector imported machinery worth US$
233.4 as compared to US$ 164 million, an increase of over 42 per cent.
Import of construction machinery registered nearly 54 per cent
Fertilizer accounted for US$ 141 million in the
import bill, an increase of 13 per cent. This was on account of a 44
per cent increase in quantity. This can be attributed to larger import
of DAP due to discontinuation of DAP production by FFC-Jordan.
The drought specter looming over agriculture for
almost two years has undermined the growth of the sector and in turn
caused slackness in overall economic growth. To mitigate the adverse
impact, stakeholders are engaged in searching various alternatives
including substitution among crops — from more water intensive to
less, where feasible. During the current fiscal year some shift
occured from rice to cotton. Though, this instant change reflects the
farmer's enthusiasm to match changing environment, it could not bring
the matching impact on the size of respective crops due to the decline
in per hectare yield of the crops. Based on the available data on area
and production of various crops, growth prospects are consistent with
the targeted growth of agriculture sector as a whole.
There was a 16.5 increase in gross disbursement of
credit to agriculture sector. Purpose-wise breakup revealed that 19.4
per cent increase was registered in production loans, while
development loan declined by 2.6 per cent. It was also observed that
commercial banks were more aggressive in extending credit to
agriculture sector. Entry of five private banks in the field of
agriculture financing was a major breakthrough. Though, new entrants
disbursed about Rs 244 million, the main achievement was change in
attitude of private commercial banks towards agriculture financing.
This became possible on account of the policy changes made by the
central bank during last couple of years.
The KSE-100 index shed over 116 points in just
three trading days following the September 11, 2001. With sudden
change in market sentiments, most of the players were caught off
guard. Due to the decline in market value of investment financed by Badla
, these players were trapped in rising cost of Badla finance.
As a result of timely intervention by the government in the second
quarter, expectations were that Pakistan would reap significant
benefits. However, subsequent development in relationships with India
caused some dent Even though the Indian government continued with its
rhetoric, the market rebounded strongly with the start of year 2002.
Since restoration of investors confidence became a
priority, both the regulators and stock exchanges have been playing an
important role. The successful introduction of T+3 system and the
various other measures have improved market efficiency and
transparency. There are still certain weaknesses that need to be
addressed. These include poor disclosure by the companies. There is a
need to learn from Enron fiasco, highlighting the issue of poor
accounting disclosure. This demands improving both internal and
external auditing standards. The myth of self-regulation that is
prevalent in accounting industry needs to be addressed without any
Also, the issue of Badla financing,
which now and then creates tremors in the market, needs proper
regulation. As a matter of fact, brokers simultaneously acting as
intermediaries and Badla financiers present clear
conflict of interest situation.
An area which is a source of encouragement is the
corporate debt market, showing an immense growth. Twelve new issues
were floated since the commencement of this fiscal year. More issues
of TFCs are in the pipeline. The central bank has also allowed
commercial banks to issue TFCs to augment their supplementary capital.
These issues will be unsecured, with a minimum maturity term of 5
years and must be rated 'A' by credit rating agencies. This will allow
banks to raise funds to match their medium term requirements.
FOREIGN DIRECT INVESTMENT
According to a report, Pakistan has received US$
254.5 million foreign direct investment during first eight months of
current financial year as compared to US$ 199 million during the same
period of last year. The investors from USA invested US$ 148.5 million
but at the same time US$ 12 million were withdrawn from portfolio
investment. The other significant investment came from the UK and the
UAE totalling to over US$ 35 million. The oil and gas exploration
sector attracted bulk of the investment amounting to about US$ 105
million. It is expected that with the establishment of Oil and Gas
Regulatory Authority investment in this sector will further grow.
Another sector, pharmaceuticals, which is already dominated by
multinational companies offers enormous potential for foreign
investors. However, the outlook for this sector is directly dependent
on the pricing policy of pharmaceutical products followed by the
government. Unless the key issues are resolved investment in the
sector may not become a reality.
Speedy and smooth privatization not only offers
opportunities for local investors but can also fetch sizable foreign
investment. Lately, the sale of 90 per cent share of Pak Saudi
Fertilizer has confirmed the GoP's commitment but also fetched an
attractive deal. Earlier, 10 per cent shares of National Bank of
Pakistan were offered to general public. This has paved way for the
sale of shares of Habib Bank and privatization of United Bank. The GoP
has also invited Expression of Interest (EoI) for the sale of 51% to
74% shares of Karachi Electric Supply Corporation (KESC). Looking at
the market size and inherent potential, its financial advisor and the
GoP aims to conclude the deal by end September this year.
Despite the increased foreign assistance and
favourable external developments, there are still many unknowns and
imponderables. Exports are expected to remain under pressure. Pakistan
should not deviate for a moment from the course of economic reforms
and restructuring which are aimed at enhancing the competitiveness of
its real and financial sectors. The country must continue the process
of building its institutional strengths and improving economic
fundamentals and reduce the perceived risk. This require a three
pronged approach; continued implementation of prudent macroeconomic
policies; vigorous pursuit of sectoral reforms; and focused
interventions for poverty alleviation.
Macroeconomic stability should be maintained by
gradually reducing the fiscal and current account deficits, and
keeping the inflation low. More importantly, gains from improved
economic governance, which are possible through provision of level
playing field, transparency in decision-making, and predictability and
continuity of economic policies should be institutionalized. This is a
long and daunting agenda and temporary gains should not distract us
from pursuing reforms vigorously.