External sector woes persist, IMF loan

4 Nov 2013

all eyes are set on the release of the $500 million plus second tranche of a $6.7 billion IMF loan.

Officials of the ministry of finance say they have approached Citibank, HSBC and China International Banking Corporation to advise them on the bond issue to shore up the dwindling foreign exchange reserves.

Overall liquid forex reserves have fallen below $10 billion primarily because of heavy external debt payments. Most recently, Pakistan repaid about $251 million of a previous IMF loan in two installments; one on September 27 and the other on October 1.

Besides, foreign companies repatriated $202 million in profits and dividends abroad between July and September, up 54 per cent compared to what they had sent in the year-ago period. The rupee is understandably under pressure and has lost about 7.3 per cent value against the dollar in four months to October.

Despite the better-than-expected performance of exports, remittances and FDI, Pakistan’s current account deficit in Q1FY14 expanded, though the overall balance of payment posted a big surplus. The rupee’s slide continues as the current account balance influences short-term exchange rates more than the total balance of payments does.

Policymakers are pinning hopes on the next tranche of the IMF loan to serve as a breather. An IMF delegation is currently assessing Pakistan’s economic performance in Q1FY14, prior to making a decision to release $550 million in the second tranche of the loan.

Officials expect that the IMF delegation will clear the way for the release of the next tranche of the loan, relaxing a couple of pre-qualification criteria like maintaining forex reserves at a certain level and the collection of tax revenue. In both areas, Pakistan’s performance has fallen behind the tentative targets set out at the time of the approval of the loan.

And all is not bad, either. Things are, in some ways, moving in the right direction for Pakistan to qualify for a waiver.

Export earnings grew more than 19 per cent year-on-year in September, backed by 12 and 15 per cent rises in food and textile exports respectively. A huge $347 million inflow through exports of petroleum, naphtha and coal also contributed to such a big rise in exports. In September last year, the country had earned almost nothing through exports of these items.

Overall exports in the first quarter also rose more than nine per cent, chiefly due to the contribution of the above-listed categories.

“Ever-deepening penetration of our food and textile exports in Chinese markets; uptick in demand in the EU; increasing shipments of value added textiles to USA; continuing buildup in petroleum and naphtha exports — all indicate that export earnings will grow by double digits in the coming months,” says a senior official of the Trade Development Authority of Pakistan.

“Jewellery exports (that recorded an 83 per cent decline in the first quarter) are also expected to recover fast, as new rules on imports have become operational since August and the import of gold by jewellery exporters is on the rise.”

Remittances from overseas Pakistanis posted a phenomenal 27 per cent increase in September, as the State Bank of Pakistan tightened the monitoring of remittance flow through banks and foreign exchange companies, and a small dent was made in capital flight. The overall growth in remittances in the first quarter also stood above nine per cent.

Bankers and executives of forex companies say they foresee 10 per cent plus growth in remittances in the next three quarters, citing stricter reporting requirements imposed on forex companies by the central bank as the basic reason for their optimism. The launching of several mega construction projects in the GCC region, particularly in Saudi Arabia and the UAE, and a streamlining of the procedures of remittances from the UK also fuel hopes for growth in overall remittances.

The UK is currently the fastest growing remittance market (with a 35 per cent increase in inflows from there in the first quarter), and Saudi Arabia is the biggest source of remittances. In Q1FY14, remittances from there exceeded 28 per cent of the total.Foreign direct investment also grew 85 per cent in Q1FY14 from Q1FY14 on the back of strong inflows (in descending order) from the US, Switzerland, Oman, Hong Kong, UK, Italy and Austria.

Investment road-shows held at the beginning of this fiscal year are believed to have started showing results, and officials of the Board of Investment say FDI inflows would keep growing in the coming months.

They say that the bulk of the FDI is flowing into oil and gas exploration, agriculture and livestock, electricity production, construction, food processing, textiles and chemicals.

During the first two months of FY14, large-scale manufacturing (LSM) grew by 6.5 per cent, providing more reasons for an optimistic outlook for the industrial sector despite the energy crisis. More recent data is not available, but the growth in exports of industrial goods in September indicates that LSM output expansion is in progress.

According to the Pakistan Bureau of Statistics, output of key industries like fertiliser, electronics, food, beverages and tobacco, paper and board, coke and petroleum products, and leather goods saw double-digit increases in July-August of this fiscal year. Iron and steel products, textiles, pharmaceuticals and chemical industries also recorded marginal increases in production.

In agriculture, the cotton output up to October 1 has shown about seven per cent year-on-year growth. But according to latest Suparco estimates, the overall output is expected to reach 13.155 million bales, lower than this year’s original target of 14.1 million bales.

Rice and sugarcane production estimates of seven million tonnes and 69 million tonnes respectively are, however, above their targeted levels of 6.2 million tonnes and 65 million tonnes. Courtesy Dawn
by Mohiuddin Aazim

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