Non-debt inflows: Beaten black and blue

Monetary diplospeak may not always be a good thing. Calling the external account situation broadly stable, the central bank isnt yet sounding alarm over the worsening shape of Pakistans major non-debt creating foreign-exchange sources exports, remittances, and net FDI. At best, the SBP has termed the recent drops in these inflows as structural weaknesses, a challenge, as per its latest quarterly review.

Lets take a step back and look at how these inflows, which are vital for an economy that has periodically run into BOP crises, have fared in the past ten years. Between FY07 and FY16, Pakistans economy more than tripled in rupee terms and nearly doubled in dollar terms. But after a decade, goods exports in FY16 were just 1.3 times that in FY07. Worse, the FY16 net FDI was a mere 40 percent of what it was back in FY07!

No wonder the shares of goods exports and net FDI in the GDP have slid in recent years, as the illustration shows. These two inflows together constituted roughly 15 percent of (dollar) GDP in FY07 a decade later, their share had slumped to 8.4 percent. In this situation, the onus of balancing Pakistans external payments has continued to fall hard on expensive debt-financing at home and abroad. That dangerous situation, which is now prevalent more than ever, could have been made worse if it were not for some Pakistanis toiling abroad!

The saving grace among non-debt inflows has been the workers remittances. It scaled an all-time high of $19.9 billion in FY16, about 3.6 times the FY07 level. But that decade-long growth spell had little to do with Pakistans economic fundamentals. And the joyride may already be over, as the famed remittance growth has tapered off lately. In fact, 1QFY17 was the first quarter in 4 years to record a negative year-on-year growth, due mainly to the oil-induced GCC slowdown and stricter AML/CFT regime in the US.

Strength of exports and inward FDI arguably reflects a countrys economic competitiveness. But Pakistans now long-running fatigue with these two inflows makes one wonder what is more bizarre. These gloomy datasets, which suggest an economy that is gradually de-industrializing itself? Or the buoyant chatter in many business circles of an impending economic boom? Yes, we also notice the Chinese, nos amis, pouring in. But sans an industrialization strategy, we find it difficult, if not impossible, for Pakistan to maneuver the CPEC design to create and sustain its own competitive advantage.

To be fair to the SBP, it is the only body that is even flagging the non-debt-inflows situation. The tale of Pakistans major export categories such as textiles, rice, leatherwear, etc. losing out to regional rivals on account of price-competitiveness and branding has been told too many times in its periodic reviews. And the central bank can only go so far it cannot draft or lobby for specific trade policies, for instance.

Mind you, 1QFY17 was the tenth successive quarter of year-on-year export decline! The influential minds in the Sharif cabinet seem to be taking this situation lightly in the wake of CPEC agreements. If politics motivates them, they should pay heed, or these numbers might sully their partys economic scorecard come elections in late 2018.

Data show that the current PML-N federal governments performance on exports and net FDI in their first three fiscal years (FY14-FY16) has actually been worse than the PPPs much-lamented gig in the corresponding period (FY09-FY11). That automatically answers the question of their economic competition with the era of Musharraf, PML-Ns bte noire. Data show that both the PPPs and PML-N federal governments, in their eight fiscal years (FY09-FY16), collectively attracted roughly the same net FDI ($14.3 bn) as the Musharraf regime did ($14.1 bn) in its twilight, during its last three fiscal years (FY06-FY08).

While the government has its work cut out on the policy front, the private sector shouldnt get off the hook easily. In this environment, it becomes even more critical for exporters to go off the beaten path of pleading for industry packages, and instead, innovate to be competitive in this low-interest-rate and relatively-safe business environment. The SBP also puts the onus of a turnaround on the private sector.

But whatever the government and the businesses do; the external front may only get tougher from here on in the short- to medium-term. Economic nationalism and its detrimental impact on an already-laggard recovery in the developed countries would worsen the wound. After all, quite a few countries in the North American and Western European regions happen to be major buyers of Pakistani goods, major sources of its FDI, and generous hosts for its remittance inflows.

In that context, placing all bets on the Chinese doesnt sound all that wishful. But it is wishful nonetheless. [For more on that, read this columns running coverage on CPEC, including Negotiating CPEC, published on January 6, 2017, and CPEC wont have everything for everyone, published on December 15, 2016.] Instead of romanticizing CPEC, the economic planners need to ingest a healthy dose of economic realism. And one place to start is to objectively mull over the causes behind Pakistans waning competitiveness.