FOREIGN LIQUIDITY SQUEEZE - ARE WE HEADING TOWARDS A DISASTER?

SHAMSUL GHANI (shams_ghani@hotmail.com)
Sep 8 - 14, 2008

Country's foreign reserves have entered the single digit zone. State Bank has in its kitty $5 billion plus while $3 billion plus are held by banks. The import export parity lies disturbed to an alarming proportion. It seems as if last year's huge trade gap of $20.75 billion has been taken as benchmark for the coming years, as imports in July-08 have outsized exports by $1.6 billion which, when annualized, will give a figure close to last year's gap. Would we be able to survive $20 billion trade gap for two successive years.

Macro Economic Indicators - July-08, as released by the Board of Investment

Foreign direct investment

$0.341 billion

Foreign portfolio investment

$(0.119) billion

Net inflow of foreign investment

$0.222 billion

Export

$1.900 billion

Import

$3.500 billion

Workers' remittances

$0.627 billion

Foreign exchange reserves

$9.900 billion

KSE-100 index

10,584

Annual foreign direct investment, till mid-nineties, remained below dollar one billion. It was in 1995-96 when FDI peaked to $1.1 billion, but dropped down to $0.548 billion the next year, then finally came down to $0.420 billion in 1999. It was after 9/11 that relations between US and Pakistan found a new dimension. Pakistan became the front line US ally against the war on terrorism. It was raining dollars all around in the shape of aids, grants, foreign direct investments, foreign portfolio investments, workers' remittances, privatization proceeds etc. Pakistan's foreign reserves grew from $0.908 billion in 1999 to $4.3 billion in 2001-02. From then on, we didn't look back, and our foreign reserves rose to $16.5 billion in October 2007. Unfortunately, thereafter, Pakistan went through self inflicted political destabilization and its foreign reserves halved during a short period of 15 months. The relations between US and Pakistan have again taken a dramatic turn - having already changed from cordial to indifferent, and ready to move from indifferent to sour. The following table showing inflow of US economic dollars is a telltale sign inflow/outflow of political dollars not being our subject.

NET FOREIGN PRIVATE INVESTMENT

MILLION US$

FOREIGN INVESTMENT

FY08 US SHARE

FY08 TOTAL

US TO TOTAL

FY07 US SHARE

FY07 TOTAL

US TO TOTAL

JULY08 US SHARE

FDI

1,309

5,153

25%

913

5,140

18%

54

Portfolio

439

19

2311%

853

1,820

47%

(93)

Total

1748

5,172

34%

1,766

6,960

25%

(39)

During FY08 the signs of withdrawal of US economic support were not in sight, except that the portfolio investment contribution was reduced from $853 million to $439 million and that was understandable in the face of a crashing stock market. But then, US perhaps having decided to jettison Musharraf, the first month of FY09 saw a marked change in US economic behavior when a negative inflow of $39 million was recorded.

How we have taken this situation? Totally oblivious of the gravity of affairs, the politicians are having busy days in the office trying to outmaneuver one another. The economic mangers seem running short of ideas. US, historically the top contributor to our foreign currency resources, has perhaps decided to tighten its noose around us. And those who understand the meanings of US economic noose are finding a wave of horror traveling down their spine line. When noose gets tightened, World Bank and IMF indulge in a show of arrogance. Being at ease with the likes of Shaukat Aziz, they treat the new faces with disdain pressurizing them day in day out to do away even with the minimal subsidies available to our all important agriculture and energy sectors.

The foreign investors and their dollars become a rare commodity. Our Islamic brothers wait for a US nod to be able to extend any assistance to us. The piece meal financial assistance is made subject to certain harsh conditions directly affecting the masses and country's internal security. Even an approved ADB facility becomes a slow-paced affair. ADB is said to have agreed to release the first tranche of $500 million of an agreed program loan. What role this peanut support of $500, if released, is going to play in our dark economic hour, is in any body's guess. Our officials have recently met the senior officials of World Bank led by their vice president Ms. Isabel who was of the view that the directions of our policy was right but more concerted efforts on our part were required. Doesn't this smack of oft-tried "do more" tactics?

The question is who should be held responsible for creating this mess, the previous government, the media, the civil society, the caretaker government or the newly elected government. May be, during the last one year, we have won a few ideological battles, but what for the economic hit the nation as a whole has taken. Who will make good this damage and how long will it take to put the economy back on rails.

A team of US business representatives recently visiting Pakistan for closer economic cooperation and early conclusion of Bilateral Investment Treaty (BIT) said that their visit was primarily aimed at "getting a first hand insight into the mindset of the new government and to learn about their plans towards investment by overseas companies". So, it looks like "back to square one" situation. The run-away jittery investor is likely to take his own time before deciding on his return to our markets. Any immediate relief does not appear coming from anywhere. Then how to get out of this foreign liquidity squeeze? Through sale of strategic assets like PTCL, OGDC, HBL, UBL and may be PSO and PPL? But given the mutilated condition of our stock market, reasonable pricing of these assets seems impossible. The bale-out operation will be finally undertaken by the international lending agencies, though at a cost much higher than any one could imagine. This time a few political strings might also get attached.