RISE IN OIL & FOODS IMPORT BILLS
SHABBIR H. KAZMI
Jan 2 - 8, 2012
During calendar year 2011, rupee depreciated by almost five per cent against a dollar, which has become a cause of concern.
With the commencement of payment to the International Monetary Fund (IMF), beginning early 2012, the position can turn real precarious if no corrective measures are adopted now.
It seems almost certain that to avoid default Pakistan will have no option but to approach the IMF for another standby facility.
While probability is that IMF will eventually agree to lend support, the conditions will be very stringent. Pakistan will once again be trapped in a vicious circle where it will be forced to borrow to pay off the liabilities. It is still not too late and if right types of policies are introduced, IMF support could be solicited at reasonable terms. The necessary steps include 1) curtailment of lavish expenditures of the rulers, 2) adherence to good governance and 3) ensuring accountability of policy planners and decision makers.
To take appropriate measures to contain rupee depreciation, the first step is to understand the reasons for the weakening exchange rate parity.
The main reason behind falling value of rupee is persistent increase in import of food items and crude oil as well as POL products. Pakistan's oil and eatables import bill soared 31 per cent during first five months of 2011-12 over the same period last year triggering higher than expected trade deficit.
Share of these products in overall import grew to 46 per cent from 41 per cent last year. In absolute terms, the five months (July-Nov) import bill of these commodities reached to $8.43 billion as against $6.391 billion for the same period last year. Statistics showed the oil import bill reached $6.299 billion during this period, up by 49 per cent from $4.237 billion for the last year. This mainly reflects the spike in international oil prices.
Analysts strongly believe that oil import bill is likely to grow further because of looming gas shortages. Unless there is a sharp fall in international oil prices, the pressure is likely to continue. In fact, the probability of rise in price is high because of growing tension between the United States and Iran, leading to blockade of Strait of Hormuz.
The second reason for exchange rate volatility is growing current account deficit. Widening of current account deficit indicates that more dollars are flying off. If the massive outflow continues, it can lead to balance of payments crisis.
Pakistan will not have enough foreign exchange reserves to pay for imports and meet debt-servicing obligations. Though the issue has not attained an alarming level, the country seems to be moving in that direction.
Foreign exchange reserves stood at $16.68 billion during first week of December last and likely to further erode at this yearend. There are growing concerns because reserves are on the decline after having touched a record high of $18.31 billion.
The fall in reserves can be attributed to suspension of IMF program, virtually no release of fund under coalition support fund, and delay in release of funds by other multilateral financial institutions in the absence of 'letter of comfort' from the IMF.
IMF's standby program ended prematurely with last two tranches remaining undisbursed. It is said that Pakistan opted not to avail the remaining two tranches. Pakistan has to make a large repayment of about $1.2 billion in the second half of current fiscal year.
In 2012-13, it has to pay the IMF about $3.04 billion, in 2013-14 $3.38 billion, and in 2014-15 $1.33 billion. These payments will widen the current account deficit, which coupled with the lack of external aid and rising imports, likely erode foreign exchange reserves, and bring exchange rate under pressure.
Historically, the United States has remained the biggest donor to Pakistan and allocated some $20 billion in security and economic aids to Pakistan since 2001, much of it in the form of reimbursements for assistance in fighting militants.
However, with the rising tension between the two countries in the aftermath of arrest of Raymond Davis, Bin Laden's episode, and Nato attacks on security check posts, relations between the two nations have soured.
There are fears that the United States may suspend all sorts of assistance. Two senior Republican senators have recently called for a thorough review of US relations with Pakistan, declaring that all security and economic aid to Islamabad must be reconsidered.
There are also concerns that foreign aid and international loans from other agencies and countries could dry up because of tensions in US-Pakistan relations. Any decrease in external financing will add to current account deficit, which would further weaken the rupee.
While external assistance is linked with many ifs and buts, four items appearing on import list fertilizer, cars (CBUs), cell phones, and edible oil will wear away country's foreign exchange by about five billion dollar during current financial year. This amount can be conveniently reduced to less than half. Pakistan must curtail import of palm oil by enhancing production of corn, sunflower, and canola.
The higher import bill of palm oil is because of higher domestic demand and cut in import duty. As a result, its import was up by more than 40 per cent during this period compared to last year. Similarly, about 13 per cent increase was also recorded in import of soybean oil.
The government should also introduce E-10 (motor gasoline containing 10 per cent alcohol). If fully implemented, it can help in reducing motor gasoline import by 10 per cent. It must be remembered that this blended motor gasoline can be used without making any change in the carburetors of cars. With the latest decision to close CNG stations for one moth, use of E-10 can reduce woes of motorists.
While some of the experts are of the view that closure of CNG stations is temporary, others strongly believe that with nearly 50 per cent hike in CNG price there will be no incentive in using gas. Pakistan has spent millions of dollars on the import of CNG kits with investors having invested billions of rupees in this sector. The only tragedy is that soon all these will be rendered useless.