Criticise him all you want, but the fact is that Finance Minister Ishaq Dar’s “transactions” have staved off a BoP crisis for the foreseeable future. Now, he is on his way to close his maiden fiscal year with some solid BoP surplus, while his detractors pick holes in the maverick accountant’s exploits.
Latest SBP data show that Pakistan’s balance of payments stood at $3.33 billion in the Jul-May period, a remarkable turnaround from a bulky deficit seen in the same period of last year. A few negatives remain, but the overall BoP scorecard is satisfactory. Even after excluding the $1.5 billion Saudi development grant (shown in capital account), BoP is still in surplus, with nearly 200 percent growth over 11M FY13.
To begin with, the current account deficit (CAD) has swelled 19 percent to exceed the $2.5 billion mark. There is nominal increase in trade deficit in goods as export growth slowed down to 1.3 percent in this period. Despite the GSP+ hype, textile exports haven’t registered a significant increase thus far. The goods deficit could have been higher had imports grown by more than the existing 3.2 percent.
But, the real blow to the CAD was dealt with by huge increase in services’ deficit. A 42 percent year-on-year decline in CSF proceeds to $1.05 billion this year was primarily responsible for a 21 percent slump in services’ exports. A $375 million CSF payment that arrived last month and a seven percent decline in services’ import to $7.1 billion helped a bit, but couldn’t assuage the damage.
Adding to the CAD increase was primary income deficit, which was also widened during the period, primarily on account of double-digit growth seen in profit and dividend repatriation by foreign investors. Strong growth in remittances, however, kept the CAD from ballooning any further.
Due to the above mentioned factors, CAD increased to 1.13 percent of GDP in 11M FY14 from 0.99 percent in the same period of last year. However, this increase is not worrisome for two reasons. One, it is small in size. And two, current account deficits tend to be manageable as long as a forex-dependent country has sufficient buffer available to finance them: the financial account.
And the financial account has shown tremendous surplus in the period under review-–the surplus is over 20 times of last year’s tally-–thanks to Dar’s operations in the latter half of this fiscal year. The net FDI has indeed failed to impress so far. But, if it weren’t for Dar’s push for the 3G/4G spectrum auction to take place this year, the small growth seen thus far would have been negative.
The stellar growth in ‘portfolio investment’ inflows also helped turn the BoP tide this year. Equity securities’ investment saw a growth of 245 percent leading to an inflow of $339 million in Jul-May. But it was the $2 billion Eurobond debt issue in April that made the real difference. With these transactions, currency has been stable in a narrow band for some time now. Forex reserves have also shown remarkable strength during the 11-month period that helped strengthen the import cover.
Despite the rosy BoP scene at the close of FY14, a note of caution is in order. What has worked this year may not cut it next fiscal year. Notion of a ‘strong currency’ has come to hurt exports’ growth while limited energy supplies, gloomy investment environment and related factors have stymied FDI inflows, which is needed for export-oriented industrial activity. BoP’s strength is centered on these equity inflows-–exports and FDI-–in the absence of which debt-creating inflows like Eurobonds and GDRs are hardly sustainable.
Outflows also demand attention. Machinery imports have picked up during the year, a favourable economic signal, all the while keeping overall import growth in check. However, next year may witness a rupture in trade deficit on account of Iraq’s civil-war-in-motion, the Syria imbroglio and chaos in Libya. A BR Research calculation shows that Pakistan’s oil import bill will go up by $1.5 billion per annum for every 10 percent increase in crude oil’s price per barrel.
While they must be cognizant of the reality, Dar and co. are expected to counter the BoP risks next year with more capital market transactions (both debt and equity issues) of government-majority-owned crown jewels. However, a long-term view is required to keep the BoP solvent. For that, efforts have to be made on the policy front, so as to use up the already-installed industrial capacity to boost exports and create more jobs. Serious reforms have to be made to send good signals to potential investors. Security operations are a good start.
The FY15 budget has some worthy proposals for economic uptick, but for better results, the Prime Minister must take along all the cabinet members and ancillary organisations to implement the measures and do mid-year policy tweaking. Finance Ministry alone cannot-–and should not-–be the enforcer, otherwise it may again result in an overwhelming emphasis on accounting over economics.
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KEY ITEMS: BALANCE OF PAYMENTS
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$ (mn) 11MFY14 11MFY13 Chg
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Current account balance (2,577) (2,157) 19%
Balance on trade in goods (14,934) (14,032) 6%
Balance on trade in services (2,161) (1,413) 53%
Balance on primary income (3,643) (3,411) 7%
Workers remittances 14,333 12,756 12%
Capital account balance 1,753 253 593%
Financial account balance 4,364 212 1958%
Net FDI 1,362 1,328 3%
Portfolio investments 2,350 103 2182%
Overall balance of payments 3,336 (1,863)
Net liquid reserves with SBP 8,684 6,392 36%
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Source: SBP
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