As apprehended if the trade deficit swells to USD 13 bn in 2006-07, the cash inflow under FDI (mostly privatization proceeds/portfolio investment coupled with workers' remittances amounting to USD 5 bn) will not be able to cover it.

Feb 12 - 18, 2007

Pakistan's overall balance of payments has almost always been in negative with the exception of one/two years in 1950s when the Korean war boosted our exports - and two years or so in the aftermath of 9/11 when we became reasonably surplus in the external account. Our balance of payments was surplus to the extent of USD 2.7 billion in the fiscal 2001-02 (FY-02), and USD 4.6 billion in the fiscal 2002-03 (FY-03).

During the fiscals FY-02 and FY/03 too, when we were surplus in the overall balance of payments, our external trade ran into deficit. This deficit continues to grow with the passage of time and has assumed an alarming situation during the last 3 years or so. The position is depicted in the following table:

[Figures in U.S.$ billion]





(2-3) 1
















July-Nov. [2006-07]




This data is based on SBP's record of export receipts and payments for imports

It can be seen from the above table that despite the signs of reduction in imports, the trade gap is on the increase as there has been only marginal increase in the exports. If we base the annualized data of the trade deficit for the fiscal 2006-07 on the above figures, it will reach nearly USD 13 billion i.e. almost 50 per cent higher than the trade deficit of the previous fiscal 2005-06.

The question is from where to finance this deficit? The mainstays of the present economic managers are: (i) workers' remittances and (ii) Foreign Direct Investment (FDI). God had been merciful on us that in the aftermath of 9/11, the Western and some Middle Eastern governments initiated anti-money-laundering measures which diverted bulk of the workers' remittances from hundi/hawala system to the official banking channels. This has helped in raising the workers' remittances from USD 1-1.5 billion per annum (pre-9/11) to over USD 4.5 billion. In the State Bank of Pakistan's (SBP's) report for the first quarter of the fiscal 2006-07 (QR1), the amount of July-November 2006 remittances has been put @ USD 2.093 billion; if annualized at that rate, the figure for the fiscal 2006-07 would reach/exceed USD 5 billion.

As for FDI, it can be divided in two portions; firstly the privatization proceeds and secondly the plant & machinery, technical know-how and services, etc. While the first portion of the FDI can be and is being used for covering the trade (and other external sectors) deficit, the second portion cannot be utilized as such because for meeting such deficits hard cash is required. As is put by QR1, the FDI inflow during July-November 2006 is USD 1.476 billion which, inter-alia, includes sale proceeds: (a) Union Bank Ltd received from Standard Chartered Bank Ltd. $ 197.6 million, (b) Pakistan Telecommunication Company Ltd. $ 133 million and (c) M.C.B. Bank Ltd's GDRs fetched $ 150 million, etc.

QR1 states a further sum of USD 426 million was a received in the shape of "portfolio investment" in the stock exchange during July-November 2006. It is widely believed that the "portfolio investment" is merely a "Hot" money, crosses international borders quickly and freely and may pose a serious problem at times for countries like Pakistan which are vulnerable in the external account. It may be recalled that in 1997, the Asian Tigers had suffered a lot in the external sector and the "portfolio investment" was one of the causes. It will, therefore, be very unfortunate if our economic managers depend on this source for financing the trade deficit.

If, as expected, the trade deficit swells to USD 13 billion in 2006-07, the cash inflow under FDI (mostly privatization proceeds]/portfolio investment coupled with workers' remittances amounting to U.S.$ 5 billion) will not be able to cover it. It appears that this is the sole reason which explains the hurry/anxiousness of the economic managers for internationalizing (selling to foreigners) the national assets to generate foreign exchange for the purpose. The company representing the "lifeline" for the country - Pakistan State Oil Company Ltd - will perhaps be sold in March 2007. The sale of the gas companies has temporarily been put on hold but for how long? The sale of Pakistan Steel Mills has also been put on hold for a year but its internationalization did not put any thing in the government's pocket but had rather taken away some thing from it.

The anxiety for covering the trade (and current) account deficit during the current fiscal also seems to be the sole cause coercing the economic managers to float the government bonds in the international market as well as getting the GDRs floated by Habib Bank Ltd., National Bank of Pakistan, United Bank Ltd., Kot Addu Power Company Ltd, etc. In fact it is not these institutions' real need to float these papers internationally.

In case these measures do not succeed in addressing the issue, the option will be to borrow internationally left and right (including laying hands on the Arab friends to donate) or lastly to draw down on the "much propagated hefty reserves" built up by the post 9/11 environment.

The "pink pill" solution usually offered by the international lending agencies, including the World Bank and the International Monetary Fund (IMF), for correcting the external sector imbalance is devaluation of the rupee. The studies undertaken in the past covering about 30-year period since 1972 show that during 1982-1998 period when we were on the managed float and the rupee was devalued almost on daily basis, neither the exports increased nor imports decreased to the extent which could do away with the disequilibrium. Some people argue that it is necessary to devalue rupee to stop decline in the exports. To this end, the period covering the fixed rate regime (1972-1981) was also studied and the results were identical to the 1981-1998 period. SBP now also recognizes the above position and this type of assessment is available in QR 1.

Thanks God that these days the country is free from IMF programs otherwise it may have by now coerced us to devalue the currency.