Pak government looking for silver lining in the dark sky

BALLOONING current account and trade deficit and other external imbalances are adding t the economic woes of the new government which still has to come up with immediate policies and a longer term vision to stem the tide of worsening indicators.

By M. Aftab (Analysis)

Published: Sun 29 Jun 2008, 11:49 PM

Last updated: Sun 5 Apr 2015, 1:13 PM

Pakistan’s current account deficit (CAD) widened to an all-time high of $13 billion in 11 months to May, of the current fiscal 2008. By the time the fiscal ends on June 30, CAD will widen still more. The trade deficit widened to a record $18.756 billion - up 52 per cent - compared to $12.311 billion in the like period of 2007. It may widen to $21 billion by June 30, as year-end statistics are awaited. Trade deficit in full fiscal 2007 was $13 billion.

The government has projected the CAD at $12.7 billion, which is 7.7 per cent of GDP, for fiscal 2009 that starts July 1. But it is unlikely to be contained at that level, given the present woes of the economy, including a slow export growth and a question mark over investment and aid inflows.

The government’s concerns have been multiplied as the oil import alone has skyrocketed to $10.094 billion in 11-months to May, 2008, up 52.21 per cent compared to $6.631 billion in the like period of 2007 fiscal. By June 30, it is estimated to hit $13 billion, Federal Bureau of Statistics reports.

Oil rose to 28 per cent of overall imports this year, compared to 23 per cent in 2007. It, alone, is responsible for a 40 per cent growth in total imports. Other key imports were: machinery, telecom equipment, textile machinery, farm inputs, chemicals, and food including wheat, and palm oil. The overall imports totalled $35.943 billion in 2008 - up from $27.743 billion in the like period of 2007. The government expects imports to rise to $37.2 billion in 2009.

Exports rose 11.37 per cent to $17.186 billion in eleven months to May, 2008, up from $15.432 billion in the same period of 2007. The government’s full year projection for 2008 is $19.2 billion. Exports in 2009 are projected to grow 16 per cent to $22.9 billion. Much of the attainment of the target will depend on how for the industry can grow in spite of the continuing power outages, natural gas shortages, and whether the current political turmoil subsides or flares up more.

The country has adopted a larger public sector development programme (PSDP) envisaging Rs523 billion spending, inclusive of foreign credits and assistance of Rs67 billion. More imports, including capital goods, machinery and industrial inputs will be needed, due to this.

Other factors that will have to be watched are the GDP growth and the rate of inflation. The government estimates the GDP growth in 2009 at 5.5 per cent compared to the unachieved target of 7.2 per cent in 2008. The government projects inflation at 11 per cent, which is a far cry from the 17 per cent current inflation in 2008 while the food inflation this year already is 26.6 per cent - and both are rising.

The external balances and the state of the economy will depend, too, on as to how the farm sector, manufacturing and the services sector perform. The farm sector growth is projected at 3.5 per cent, compared to 1.8 per cent this year. The target for manufacturing is 6.1 per cent, compared to 4.8 per cent in 2008. The services sector growth is targeted at 6.1 per cent. The country will require an investment of Rs. 2,639 billion to achieve these targets. This investment is 17 per cent higher than 2008, and 21.5 per cent of GDP.

There is a good news for exporters of farm inputs to Pakistan. The government has withdrawn sales tax on pesticides, fertilizers and agricultural implements. “There will be no customs duty on agricultural inputs,” Prime Minister Yousf Raza Gilani has announced as part of his efforts to boost the farming sector, and ensure more food and industrial raw materials including cotton, for the industry and exports.

The government, but importantly, the private sector will have to do more to check the trade deficit of the services sector. Its deficit stood at $6.098 billion in 11-months to May, 2008-- a 43.48 per cent widening in the like period of 2007 when it was $4.25 billion.

In the like period of 2007, services sector imports or its outflows were $9.025 billion, while its exports or inflows were $2.927 billion. The deficit is due to rising demand for foreign transport, consultancy services, financial services and insurance.

A major factor in keeping the external balances from deteriorating further are the growing home remittances sent by overseas Pakistanis working in US, UAE, Gulf and Saudi Arabia. The home remittances target for 2009 is $7.7 billion. Fiscal 2008 saw the home remittances grow 18 per cent compared to 2007.

The CAD for 11-months to May 2008 at $13 billion is 7.5 per cent of the GDP, as compared to the target of 4.8 per cent. What hit the external balances is the fact that at this level CAD is higher than the total forex reserves. Compared to 2007, it is 81 per cent higher.

The government will have to depend on considerable borrowing from abroad. It has yet to spell out its requirements and funding sources, both International Financial Institutions (IFIs) and bilateral, government-to-government, and private credits. In May, the officials were expecting to mobilise up to $3.5 billion by June 30, from various sources, including friendly countries. But nothing has materialised so for.

Prime Minister Yuosuf Raza Gilani visited Saudi Arabia in early June to seek help. But, the effort has, proved fruitless so for.

Gilani had also expected that Riyadh will, in the shorter term, provide Pakistan with $500 million oil imports under the Saudi Oil Facility (SOF), but even this has not happened. The SOF would have been helpful because the biggest crunch on the external balances is Pakistan’s growing oil import as its international prices are soaring. SOF was provided to Pakistan in the 1990s on a request by then Prime Minister Nawaz Sharif, and it had taken quite a burden off the country’s external balances.

Faced with serious domestic political problems, and economic deterioration, the new government is looking for a silver lining in the dark sky. But, it may still take a considerable time for that to happen.

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