While the domestic economy faced a number of problems during FY11, the external sector of the country was relatively immune and fared better, with a current account surplus of dollar 0.3 billion after six consecutive years of deficits. Foreign exchange reserves held by the State Bank had risen by dollar 2.6 billion to reach dollar 15.7 billion by the close of June, 2011. Backed by these positive developments, Pak rupee remained, more or less, stable and depreciated only marginally by 0.7 percent during 2010-11. However, the year 2011-12 had witnessed a sharp reversal in this trend. The current account deficit of the country has already swelled to dollar 3.7 billion or 1.7 percent of GDP during the first eleven months of FY12 as against a nominal deficit of dollar 79 million in the corresponding period last year. It could reach dollar 4 billion or 2.0 percent of GDP by the end of June, 2012. While rise in remittances is giving the much-needed support to the current account, negative developments like stagnation in exports, substantial increase in imports, foreign debt repayments and a lack of external inflows are neutralising the positive impact of home remittances by a wide margin and exerting huge pressure on the country's external sector position. Foreign exchange reserves at the disposal of SBP are down by about dollar 5.0 billion in less than a year's time, touching dollar 10.68 billion in the latest week. The rupee is depreciating fast against the US dollar and its rate against the US currency has touched a new low of about 96. It has lost its value by about 3.5 percent only in a month's time. It needs to be mentioned that foreign exchange reserves held by the commercial banks amounting to about dollar 4.36 billion are their deposit liabilities and, as such, cannot be really used by the country to meet its foreign obligations. Reportedly, some of the foreign exchange reserves held by the SBP are also deposits of foreign entities. More worrisome is the fact that the present rapidly deteriorating trend in the external sector is likely to persist. Although, it is difficult to predict the behaviour of home remittances, exports are not like to pick up anytime soon due to a number of factors, mainly severe energy shortage that is adversely affecting economic productivity, while imports are projected to continue to maintain their upward trend mainly due to higher oil prices in the international market and low domestic production of certain essential items of daily use. As a matter of fact, closing down of factories etc due to apprehension of investors, for whatever reasons, is indirectly widening the gap between imports and exports, besides creating so many other problems, particularly increase in unemployment numbers. Foreign inflows are drying up due to a serious deterioration in Pak-US relations and a massive decline in foreign investment. While external sector of the country is under huge pressure and foreign exchange reserves have already fallen to an uncomfortable level, Pakistan has to pay dollar 2.719 billion in FY13 and dollar 3.072 billion in FY14 to the IMF for SBA facility availed earlier by the country. It means that erosion of foreign exchange reserves is going to be much faster and PKR may lose its value further in coming months. At present, the import cover calculated on the basis of SBP forex reserves is already down from 5 months to little over 3 months and if the present trend continues, it could go down further as against the import cover of about 6 months, which is generally considered comfortable. There is no doubt that prospects of external sector are very cloudy and the country is heading towards a default situation but strangely nobody seems to be very much bothered or prepared to take bold measures to reverse the deteriorating trend. It is high time for the relevant authorities of the country to think seriously and earnestly about the worsening position in the external sector before they are forced by the unfolding situation to do something drastic like going to the IMF and accepting its assistance in exchange for a very stringent reform agenda which, of course, would be excruciatingly painful. Unfortunately, however, governments in Pakistan have generally not been able to implement the reform policies themselves to steer the country out of trouble and attain a sustainable position in the external sector. It is the force of circumstances which moves them and once the storm is over, they again tend to be extravagant or at best leisurely.
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