Gains in external sector

It is fortunate that when the country is facing problems in certain major areas of the economy, the foreign sector of Pakistan is showing satisfactory performance. According to the latest data released by the FBS on 11th May, the country's trade deficit narrowed to dollar 1.28 billion in April, 2010 from dollar 1.48 billion in the same month last year due to a larger increase in exports than imports.
While exports rose to dollar 1.74 billion from dollar 1.32 billion in April, 2009, imports went up by a lower margin from dollar 2.80 billion to dollar 3.01 billion during April, 2010. Almost similar was the situation with the yearly data. The trade deficit during July-April, 2010 at dollar 12.238 billion was lower by 13.92 percent as compared to dollar 14.218 billion in the corresponding period last year, due to the higher level of exports and the reduction in imports.
The trend was also the same as compared to the previous month. The trade deficit at dollar 1.28 billion in April, 2010 was 13.61 percent less as compared to dollar 1.48 billion in March, 2010. Narrowing of the trade deficit was very well complemented by a healthy growth in home remittances, which soared to dollar 7.306 billion during July-April, 2010 from dollar 6.355 billion in the same period of the last fiscal year, showing an impressive increase of over dollar 951 million or about 15 percent.
The inflow of remittances from UAE, Saudi Arabia, USA, other GCC countries (including Bahrain, Kuwait and Oman), UK and EU countries amounted to dollar 1,663 million, dollar 1,526 million, dollar 1,462 million, dollar 1,033 million, dollar 735 million and dollar 210 million respectively as compared to dollar 1,367 million, dollar 1,264 million, dollar 1,436 million, dollar 996 million, dollar 468 million and dollar 197 million respectively in the July-April, 2009 period.
In April, 2010, an amount of dollar 755.77 million was sent home by overseas Pakistanis, up by dollar 58.25 million or 8.35 percent, when compared with dollar 697.52 million received in the same month of last year. However, April remittances were somewhat on the lower side when compared with dollar 763.7 million sent in March, 2010. According to the International Fund for Agriculture Development (IFAD), a specialised agency of the United Nations, Pakistan had shown the highest growth in the world in home remittances despite recent global financial crisis. Pakistan was followed by Bangladesh, Mauritius, Swaziland, Guinea-Bissau and Philippines, which have also shown strong growth in remittances.
There is hardly any need to emphasise that both these developments are certainly positive news for the country. Although the trade balance and home remittances are not the only components of the current account, yet their position is so overwhelming in the external sector account of the country that these two elements, more or less, determine the behaviour of its trend. As we have seen during the course of the year, the current account of the country has also shown a healthy trend due to the reduction in the trade gap and the increase in remittances and there is no reason to expect otherwise, when the overall picture for the subsequent months is compiled.
Anyhow, an improvement in the foreign sector account of the country would reduce the need to borrow from outside sources, including from the IMF, would check the depletion of foreign exchange reserves of the country and help stabilise the exchange rate of the rupee. Also, foreign investors would feel more comfortable in the solvency of the country, the flow of imports would remain uninterrupted and price pressures could be contained within reasonable limits.
Some of the analysts, who routinely criticise the policies of the government with regard to the exchange rate and monetary management, need to reassess their position. It is obvious that if the government had not allowed the rupee to depreciate, according to market conditions, and eased the monetary and fiscal policies prematurely, the foreign sector of the country would definitely have been in dire straits.
It needs to be remembered that while domestic currency could be printed to deal temporarily with an untoward situation, foreign currency could only be earned through a surplus in the balance of payments and if the country does not have the necessary foreign exchange reserves at its disposal, it cannot import the required goods and services. The implications of such a flawed strategy are thus obvious.
While developments in the foreign sector are so far satisfactory, there is a need to continue monitoring the situation very carefully. For instance, export growth remains severely constrained and if factors like energy shortages, terrorism and growing lawlessness are not taken care of properly in the near future, productivity in the country could nosedive and this could have severe implications for the rate of expansion in exports.
A phenomenal rise in home remittances, despite the global recession and large-scale unemployment in foreign countries, is yet to be fully analysed and explained. A slowdown in these remittances, in recent months, is definitely a cause of concern. Last but not the least, the country cannot run the risk of severing its present relationship with the IMF because, although developments in the foreign sector are encouraging, yet a stage has not been reached which is fully sustainable in the long-run. All these factors call for a constant review of the situation in order to take appropriate policy actions, when and if needed.