Pakistan: Export and Remittances Reduced Deficit

Karachi, Pakistan | December 11, 2007 by D-8 Secretariat

Pakistan’s current account deficit is narrowing, while foreign trade is expanding, in spite of the disturbed political situation in run up to the national elections slated for January 8, reports the daily Khaleej Times. The current account deficit (CAD) during the first four months -July-October of the current fiscal 2008 narrowed $518 million to $3 billion. The CAD in the like four months of fiscal 2007 was $3.514 billion. At this level, the CAD works out to 1.8 per cent of the hoped for GDP for the year an improvement from 2.4 per cent which was recorded in the same period of 2007. The narrowing of CDA is attributed to higher inflow of home remittances sent by Overseas Pakistanis working in the Gulf, US and UK, increased FDI, and an import slowdown. Home remittances from Overseas Pakistanis rose 26 per cent, compared to the like period of last year, to $2.81 billion. Remittances had risen to an all-time high of $5.43 billion in fiscal 2007. Officials estimate the future potential of home remittances close to $ 10.0 billion-but it is still a far off target.

The CAD situation at end-December will provide a fairly good picture of what will be the overall deficit when the year ends June 30, 2008. Exports at $ 5.84 billion are performing better this year, as indicated by by the first four months of the year. Exports in the like four months of 2007 year were $ 5.41 billion. Export growth in the whole of 2007 fiscal was a dismal 3.3 per cent. Although a 10.8 per cent export growth, so for, this year provides an optimistic picture, but it will have to be buttressed to counter the current political unease and production losses, if the country actually has to attain a 12 per cent hoped - for growth for full year, by June 30. The official target for exports for the year is $ 19.2 billion. In order to attain this target, the business and industry will have to push for a 15 to 16 per cent growth in exports during the months leading up to June 30. Pakistan has a two-pronged problem - to contain its external deficit and reduce the foreign trade gap on the one hand, and to keep imports, especially capital goods and industrial inputs flowing-in so that the industry can be fed, production expanded, and exportable surpluses enlarged to further push exports up.

Often these objectives operate at cross purposes. Compared to a 14.5 per cent increase in imports in the first four months of 2007, imports, this year, have moved up to $11.44 billion. The amount was $9.140 in the like period of last year. Imports in each of 2005 and 2006 fiscals had risen by 35 per cent, putting pressure on external balances. Imports are projected to grow between 6.0 to 7.0 per cent by June 30 year-end. The trade deficit in the four month period was $5.6 billion. The trade gap for the whole year may widen further from last year’s $13.5 billion.

Imports recorded in 2007 fiscal were $30.54 billion, while exports were $17 billion. Rising prices of imported oil are likely to worsen Pakistani trade deficit much more than last year. Pakistani rupee is also loosing value in terms of the US dollar, which itself is getting eroded in contrast to other hard currencies. This situation, if it continues, will, make imported oil much more expensive. The rising price of imported oil, and other commodities, including food, are also contributing to a rising inflation in Pakistan, at a time when national elections are due, and the government is under pressure from consumer groups and the Opposition politicians.

The oil import bill, during the July-October period, rose to $2.85 billion. Besides import of oil, food, machinery and transport equipment swelled the overall, import bill. Food alone cost $ 1.048 billion, machinery $ 2.915billion, and transport equipment and vehicles $ 968.21 million during this period. Even though a scaled down industrial activity, and reduced production of large scale manufacturing, requiring reduced import of capital goods and industrial inputs, has helped narrow the CAD, the government is allowing free imports. It followed as demand for a range of items from autos to home appliances, and consumer goods peaked off, coupled with a tighter monetary policy (TMP) being pursued by the State Bank of Pakistan (SBP), the central bank, for more than two years. TMP, in turn, has led to raising the lending rates including those applicable to leasing of autos, housing, mortgages, and other consumer financing.

Inflation has been rising, eroding the purchasing power of the consumers. Business and industry criticise the MTP for raising interest rates, that add to their financial costs, and the cost of production which, they say, is turning Pakistani products incompetitive in the global market. However, SBP is firm in maintaining this policy, which primarily aims at reducing inflation- especially the food inflation - that has attracted severe criticism of the government’s pro-growth and pro-industry policies. As the government has set its sights on a 7.0 per cent plus GDP growth trajectory, the economy has to push for a more than 20 per cent expansion in exports.

D-8 Organization is confident that with the hastened process of PTA ratification and two other important agreements; i.e Easing Visa Agreement dan Customs Cooperation, Pakistan and all member states can enhance their respective export performances. “It is also crucial to signify the importance of viable and strategic handling of the migrant worker issue, as this is another golden opportunity for D-8 countries,” D-8 Director, Amb. Kia Tabatabaee said in his office yesterday.

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