KARACHI: The State Bank of Pakistan on Saturday said that risks to external position have increased due to a larger than expected external current account deficit and continued decline of financial inflows. According to Monetary Policy Statement, external current account deficit reached $2.2 billion in first half of FY12, which is already higher than SBP's full year projection made at the beginning of FY12.
Due to rising risk and higher deficit, foreign exchange reserves have declined and there is pressure on the exchange rate. This deterioration is primarily due to a sharper widening of the trade deficit. In particular, the windfall gains to export receipts due to abnormally higher cotton prices in FY11 have dissipated faster than anticipated. The dominant impact of prices in the export performance of FY11 was always a source of concern, as it reflected an increased exposure of the economy to the movements in international commodity prices.
Moreover, due to weaker than projected global economic recovery, the demand for exports also remained depressed. At the same time, continued energy shortages and delays in the cotton arrivals due to heavy rains in Sindh, which washed away around 2.0-2.5 million bales, also affected the export performance, the MPS said.
Total export receipts during first half of FY12 were $12.0 billion and their growth turned negative. The year-on-year decline in exports is 0.8 percent in December 2011 compared to a high growth of 48.6 percent in June 2011. According o SBP, pressure on the external sector is likely to stay in remaining months of FY12.
Given the scheduled increase in repayments of outstanding loans in H2-FY12, realisation of budgeted flows, such as proceeds of privatisation receipts, euro bond, Coalition Support Funds, and 3G license fees, has become critical for strengthening the external position. In the medium term, vulnerability of the external position to international commodity price movements can be mitigated through a gradual diversification of export products and markets.
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