SUNDAY JULY 31: Current account improvement, high remittances helped in forex reserves rise

KARACHI: Fragile global economic conditions, declining financial inflows, and dominance of price effect in both exports and imports suggest caution in assessing the outlook of the overall balance of payments position. According to the MPS, on the external front, improvement in the current account due to a phenomenal growth in exports and strong growth in workers' remittances helped SBP in building foreign exchange reserves.
At the beginning of FY11, SBP had projected fiscal slippages and likely worsening of external terms of trade could translate into a significant external current account deficit. While the fiscal slippages did happen, the terms of trade improved unexpectedly during FY11 that reduced the trade balance compared to earlier projections.
In addition, a robust growth in workers' remittances and improvement in income balance contributed to a sharp acceleration in net factor income from abroad. Taken together, these factors strengthened the external current account balance (CAB), which shows a surplus of $542 million in FY11.
The export growth in FY12 is forecasted to fall to 6 to 7 percent. In forming this projection, due consideration has been given to the recent declining trend in international cotton prices, which had been a main driver of export growth in FY11.
Additionally, effects of factors like fragile global economic recovery and continued energy shortages have also been incorporated. The growth in imports is projected to be in the range of 10.5 to 11.5 percent because of recent trends in international commodity prices, including oil, and expected import demand in the domestic economy. This trade outlook, even after assuming strong growth in workers' remittance, is expected to turn the external current account balance into a modest deficit of around 0.8 percent of GDP.
The main risk in external accounts emanates from the declining financial inflows. Given an increase in debt obligations and continued suspension of IMF's Stand-By Arrangement (SBA), financing even a small external current account deficit could pose challenges in terms of maintaining an upward trajectory of SBP's foreign exchange reserves.
Nonetheless, in FY11 improvement in the external current account overshadowed this substantial decline in capital and financial inflows and there was an almost 100 percent increase, to $2.5 billion, in the overall balance of payments surplus. In turn, this helped the SBP in building its liquid foreign exchange reserves, which increased to $14.8 billion by the end of FY11 from $13.0 billion at end-June 2010.
A reflection of an improved overall external position can also be seen in a relatively stable exchange rate: Pak rupee only marginally depreciated by 0.5 percent against the US dollar in FY11. However, due to a significant depreciation of the US dollar against major international currencies, Pakistan's Nominal Effective Exchange Rate (NEER) depreciated by 8.4 percent in July-May FY11. Thus, despite a higher domestic inflation, compared to its trading partners, Pakistan's Real Effective Exchange Rate (REER) depreciated by 0.4 percent.