External sector - II

5.2 Current account The current account posted a deficit of US$ 6.1 billion during Jul-Mar FY17, more than double the level recorded during the same period last year. This deterioration was mainly attributed to the surging trade deficit, which hit an all time high of US$ 6.9 billion in Q3-FY17. The import bill, in particular, has increased on the back of a strong demand for fuel, machinery and food items. In addition, remittances also dropped by 2.3 percent YoY during Jul-Mar FY17.
On the other hand, the services deficit has exhibited a slight improvement, based on relatively better performance of exports of telecom services, and a lower travel deficit. The primary income deficit has also narrowed by 17.4 percent providing some relief to the current account balance (Figure 5.4).
Worker remittances The global remittance business has not yet recovered, as the magnitude of cross-border flows were further squeezed during CY-2016. Remittance flows to developing countries fell 2.4 percent in CY-2016, after declining 1.0 percent in CY-2015. This trend also prevailed in the South Asian region, which witnessed an overall decline of 6.4 percent during CY-2016.15 During Jul-Mar FY17, remittances to Pakistan dropped by 2.3 percent. The decline was observed from all major corridors, including Saudi Arabia, UAE, US and UK (Table 5.2); however, different factors - all exogenous in nature - were responsible for each destination (Figure 5.5).
For GCC countries, subdued oil prices have led to adoption of fiscal consolidation measures, which in turn, caused workers layoffs.16 The lower inflows, particularly from Saudi Arabia, seems to have been partially influenced by the Kingdom's tightening of labor market policies, such as discouraging hiring of foreign workers in order to lower the unemployment rate of nationals.17
This decline in inflows from Saudi Arabia is expected to be compensated by a gradual pick up in inflows from other GCC countries, going forward. For instance, Kuwait's recent decision to lift visa restrictions on Pakistani citizens; the Expo 2020 in Dubai; and the FIFA World Cup 2022 in Qatar, are all expected to have a positive impact on remittance inflows. Furthermore, the government is planning to launch Pakistan Development Fund for the Pakistani diaspora in order to channelize their remittances more effectively.18
Services account The services deficit has contracted by 2.8 percent in Jul-Mar FY17, as compared to an increase of 15.6 percent in the same period last year. This improvement occurred despite a widening in the freight deficit (due to a recovery in oil prices in the international market), and lower CSF inflows.19 Higher exports of telecom services and a lower travel deficit mainly explain this development.
Nonetheless, it is worth noting that the persistent stagnation in Pakistan's services exports, along with the recent decline in export of goods, does not bode well for the country's current account balance. Further, Pakistan's services export to GDP ratio is lower than its regional peers (like India, Sri Lanka, Vietnam, Thailand, Indonesia and Malaysia) - mainly on account of challenging security environment in the country.20 However, with the improved security situation, there is a need to pay more attention towards such exports, like computer services, so as to tap adequately their export potential.
Primary income account The primary income deficit narrowed by 17.4 percent during Jul-Mar FY17 compared to the corresponding period last year. This happened primarily due to lower repatriation by oil and gas firms. Excluding this sector, the repatriation of profits and dividends on FDI grew slightly by US$ 58 million. Higher repatriations by food and petrochemical sectors were more than offset by lower repatriations by telecom and financial firms.
5.3 Financial account Net financial inflows increased during Jul-Mar FY17 over the same period last year; though official inflows were close to last year's level. Major inflows so far this year have come from: (i) a US$ 1.0 billion Sukuk issued in October 2016; (ii) US$ 851.5 million from the Asian Development Bank; (iii) US$ 1.0 billion in mostly project loans from China; (iv) commercial loans (both short- and long term) of US$ 1.3 billion; and (v) around US$ 673 million in proceeds from stake sales of three local companies.21 Commercial banks also borrowed heavily from commercial lenders, to the tune of US$ 848 million in Jul-Mar FY17, to ensure adequate dollar supplies in the wake of a surging current account deficit.22
In case of FDI, China continued to be the top contributor, accounting for 37.1 percent (US$ 594.8 million) of total net inflows of US$ 1.6 billion during Jul-Mar FY17. It is worth noting that slightly less than half of this Chinese FDI (ie US$ 262.5 million) materialized in March 2017 alone, mainly in electricity generation and construction sectors (Figure 5.6)23; the focus areas under the CPEC initiative. That said, FDI in the power sector declined 36.6 percent on YoY basis to US$ 389.3 million in Jul-Mar FY17;24 at the same time, direct investment to the construction sector increased to US$ 264 million, from just US$ 34.8 million in Jul-Mar FY16.25
Besides CPEC-related investments, the country also received significant FDI from three merger and acquisition transactions in food, consumer electronics and financial services industries this year.26
Meanwhile, portfolio investment was dominated by public sector inflows in Jul- Mar FY17 (as a result of the Sukuk), with private investors pulling out their funds from the local stock market on net basis. Most of these outflows (81.1 percent) were noted in the three month period of November 2016-January 2017, with the pace of foreign selling having slowed down considerably since then (Figure 5.7a).27 This corresponds with the trend of foreign fund outflows from many EMs following the outcome of the US presidential elections (in November 2016), and the December 2016 federal funds rate hike.
However, after the brief volatile period, foreign funds started flowing back to some EMs from February 2017 onwards (Figure 5.7b). This dynamic didn't seem to change after the US Fed raised its benchmark rate for the second time in three months (in March 2017). As the rate increase was widely expected, global equity markets barely shrugged at the development.
In Pakistan's case, market analysts believe that foreign investor activity at the bourse in the short-term will be mainly driven by passive foreign funds, as the country formally rejoins the Morgan Stanley Capital International's (MSCI) Emerging Market Index in June 2017.
5.4 Trade account28 The trade deficit widened by 38.5 percent YoY during Jul-Mar FY17 to US$23.4 billion, against US$16.8 billion in the same period last year. This expansion was largely witnessed in the third quarter, when the deficit increased by 79.0 percent YoY and reached its highest level of US$ 8.9 billion (Figure 5.8). A hefty rise in imports alongside a decline in exports contributed to the widening deficit.
Exports Exports declined by 3.1 percent YoY during Jul-Mar FY17, after declining 13.0 percent in the same period last year. This was mainly due to a significant drop recorded in the first quarter, when both lower prices and quantums were in play. While the subsequent recovery in international commodity prices (mainly of cotton and rice) held some promise (particularly in the third quarter), their impact was more than offset by a decline in quantum exports of these commodities (Figure 5.9).29
(To be continued)
15 Nevertheless, the magnitude of drop in remittances varied across countries during CY-2016. For example, India, Bangladesh and Nepal witnessed declines of 8.9 percent, 11.1 percent and 6.7 percent respectively during this period (Source: Migration and Development Brief 27, World Bank, April 2017)
16 Besides layoffs, the number of Pakistani workers who proceeded to Saudi Arabia for work during Q3-FY17 dropped by more than 70 percent over the same period last year (source: Bureau of Emigration and Overseas Employment).
17 Saudi Arabia has decided to restrict foreigners to work in the Kingdoms' shopping malls mainly to boost employment opportunities for its citizens as part of a long-term economic overhaul (Source: Bloomberg, 20 April 2017).
18 Source: Ministry of Finance press release dated April 26, 2017.
19 During Jul-Mar FY17, average Arab Light Oil prices rose to US$ 48.0 per barrel, from US$ 40.1 in the same period last year (source: Bloomberg).
20 Source: World Bank data (2015).
21 The inflow figures for ADB, China and commercial borrowings are in gross terms, as reported by the Economic Affairs Division, Ministry of Finance.
22 In net terms, however, banks had retired US$ 263 million of short-term commercial loans during Jul-Mar FY16.
23 During Jul-February FY17, net FDI from China had amounted to US$ 332.4 million, down 37.2 percent from the same period last year. A probable reason for the significant jump in inflows recorded in March 2017 is that the reporting of CPEC-related investment inflows by Pakistani commercial banks has improved, following the coming into force of EPD Circular Letter No. 14 of 2016, which had enhanced reporting requirements for transactions under special foreign currency accounts of power companies. For details, see Box 5.1 in SBP's State of the Economy Report for Q2-FY17.
24 While most of this YoY decline (US$ 157.7 million) was noted in thermal power generation, net FDI into coal-fired power projects during Jul-Mar FY17 was down by a relatively smaller US$ 59.6 million.
25 Some construction projects that have received FDI from China in FY17 include the Havelian- Thaikot section of the Karakoram Highway, Sukkur-Multan section of the Peshawar-Karachi Motorway, and the Lahore Orange Line project, according to the Economic Affairs Division, Ministry of Finance.
26 These included: US$ 458 million from the majority stake sale of Engro Foods to Dutch conglomerate FrieslandCampina; US$ 127.7 million from the complete sale of Dawlance Pakistan to Turkish firm Arcelik; and US$ 61 million from a 40 percent stake sale of the Pakistan Stock Exchange to a Chinese-led consortium.
27 Foreign investors have sold US$ 459 million worth of equities at the PSX during Jul-Mar FY17; of this, selling worth US$ 372.4 million was recorded in Nov-January FY17 (source: National Clearing Company of Pakistan Ltd).
28 This section is based on customs data reported by the PBS, which is different from payments record data compiled by SBP: SBP reports both exports and imports as free on board (fob), while PBS records exports as free on board (fob) and imports include the cost of freight and insurance (cif). For further detail, see Annexure on data explanatory notes.
29 This analysis is based on 27 items whose quantity and price data are available with PBS. They represent around 82 percent of the country's total exports.

=========================================================

Table 5.2: Country/Region-wise Worker Remittances

=========================================================

                                              million US$

=========================================================

                              Jul-Mar

Country/Region        FY16       FY17  % Change   % Share

=========================================================

USA                1,858.7    1,729.6      -6.9      12.3

U.K.               1,807.9    1,655.1      -8.5      11.8

Saudi Arabia       4,348.9    4,078.1      -6.2      29.0

UAE                3,203.7    3,124.4      -2.5      22.2

Other GCC          1,774.2    1,706.0      -3.8      12.1

EU                   286.0      332.5      16.3       2.4

Others             1,085.5    1,422.9      31.1      10.1

Total             14,387.8   14,057.7      -2.3     100.0

=========================================================