Pakistan's balance of payments position is precarious, and the depleting reserves and depreciating rupee reflect this, says the State Bank of Pakistan. An interim report on monetary conditions, issued by SBP on Wednesday, says.
"Despite strong inflow of workers' remittances and a robust export performance (14.2 percent in July-October, FY09) the external current account deficit continues to remain on an unsustainable trajectory in FY09 after registering a deficit at 8.4 percent of GDP in FY08. This is largely due to rise in the import bill by 35.2 percent during July-October, FY09 compared to a negligible 4.4 percent growth in the corresponding period of last year.
"Strong import demand in the country and the rising international commodity prices have widened the external current account deficit to $5.9 billion ($3.0 billion during the comparable period of last year). While the decline in quantum is quite visible in many of the importable commodities, its impact has been dampened due to higher prices relative to last year. More importantly, the oil demand has not declined, and the oil import bill is still a major source of growth in the overall import bill."
SBP said it expects the pressures on the external current account deficit would recede with the help of appropriate demand management steps and the falling international oil prices that are hovering around $60 per barrel. However, the benefits of this decline have not yet been realised since the average POL price paid in FY09 so far is around $123 per barrel, which is still well above the FY08 average level of $87.4 per barrel.
Oil bill is likely to fall in the coming months as the future contracts are structured at lower prices. The withdrawal of subsidy in the form of transfer of international oil prices to domestic market is expected to dent the domestic oil consumption.
These two factors could provide a much-needed respite on the trade account. However, the perceived gains might be diluted if the current strong growth in non-oil non-food (NONF) imports continues. Therefore, it is imperative to check this trend to bring the trade account and thus external current account deficit to a manageable level.
During July-October FY09, the financial and capital account balance shows a net inflow of only $1.1 billion (compared with $3.1 billion in the corresponding period of FY08) as both public and private flows were lower than expectations.
Consequently, the SBP's foreign exchange reserves have depleted by $5.0 billion with a cumulative depletion of $10.7 billion up to November 10, 2008 since end-October 2007 when SBP's reserves were at their peak of $14.3 billion. The dollar-rupee exchange rate has depreciated by 15.3 percent since the beginning of FY09.
Rupee depreciation and fast falling reserves have generated concerns regarding the viability of the balance of payments position. Thus, calming the sentiment in the foreign exchange market through correcting the external current account imbalance is of utmost importance to ensure smooth flow of foreign inflows in the country.
The continued exchange rate depreciation, which is both a consequence (through falling reserves) and partially a cause of reduced net foreign inflows, would be addressed in the process. The solution out of this vicious cycle necessitates as follows:
-- curtailing the external current account deficit in general and import growth in particular to sustainable levels, which in turn would ease the financing requirements substantially;
-- curbing the unnecessary outflows from the foreign exchange market both within and outside the economy due to prevailing uncertainty;
-- curtailing fiscal deficit and eliminating subsidy in imported consumption in a calibrated manner to discourage the demand for imports;
-- reducing the support to the market provided on oil imports through SBP's provision of foreign exchange would also be a requirement going forward. This type of intervention, though necessary at times, is a major source of strain on the foreign exchange reserves position. It also artificially and temporarily dilutes the real adjustments in the exchange rate that are required in the face of the fast changing macroeconomic picture.
Ensuring unhindered and substantial inflow of external financing poses the foremost challenge for the economy. Initially, these much-needed foreign inflows will have to come through official sources; the private inflows will follow later once overall stability resumes in the country.
There are three issues regarding their prospects. First, the global financial markets are in the midst of a once-in-a-lifetime crisis and consequently the global investors have become extremely risk-averse. The prevailing complex law and order situation in Pakistan is not helping either.
This risk aversion is evident from the sharp rise in Credit-default Swap (CDS) points on Pakistan's 5-year sovereign bond, which touched 5000 bps during October 2008. Second, the rating agencies like Moody's and S&P have recently downgraded Pakistan's bond ratings further. Third, the instability in the exchange rate is keeping investors at bay.
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Balance of Payment Statistics (in billion US$)
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July-October
FY08 FY08 FY09
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i. CA balance -14.0 -3.0 -5.9
Trade balance -1 5.3 -3.4 -5.8
Exports 20.1 6.2 7.1
Growth rate 16.5 13.8 14.2
Imports 35.4 9.5 12.9
Growth rate 31.2 4.4 35.2
Non-food non-oil 20.6 6.1 6.8
Growth rate 20.9 13.4 11.9
Services net -6.3 -2.1 -1.7
Income net -3.9 -1.2 -1.5
Current transfers 11.5 3.7 3.1
Remittances 6.5 2.1 2.3
ii. Capital account 0.1 0.0 0.0
iii. Financial account of which 8.7 3.1 1.1
Direct investment 5.2 1.3 1.3
Portfolio investment 0 0.3 -0.2
iv. Errors and omissions -0.5 -0.2 -0.2
Overall balance -5.8 -0.1 -5.1
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