Outlook for the BoP

The balance of payments (BoP) numbers for the first three quarters of 2020-21 have just been released by the SBP. By and large, they reveal positive trends in the current account (C/A) but somewhat negative developments in the financial account.

The current account remains in surplus. It was almost exactly balanced in March. Exports have shown growth of as much as 43 percent during the month and 2 percent for the nine months. However, imports in March have also shown a high growth rate of 58 percent. Both the high growth rates are a strong reflection of the low base values due to the disruption of trade in March 2020 following the Covid-19 attack. Nevertheless, it is reassuring to see that exports in March have shown a growth of 20 percent in relation to February, higher than the growth rate in the imports of 14 percent.

Second, home remittances have shown stupendous growth in the last nine months of over 30 percent, the highest ever. This is perhaps one of the unexpected positive outcomes of Covid-19. The high growth rate has been sustained for nine months now and hopefully it will continue.

The worrying development is the big contraction in the surplus of the financial account of the balance of payments by as much $6 billion, equivalent to a fall of as much as 81 percent, compared to the level in the corresponding period of 2019-20. This is the combined outcome of a fall in foreign direct investment of almost $1 billion, outflow of portfolio investment approaching $1 billion, payment against liabilities by the SBP and commercial banks of almost $2 billion and a decline in other inflows of over $2 billion.

Consequently, the overall balance of payments has worsened by almost $3 billion in relation to the level in the corresponding quarter of the previous year. However, reserves are still up during the year by $0.8 billion and at $13.7 billion on the 31st of March, adequate to provide import cover for almost three months.

What is the outlook for the last quarter of 2020-21? This will, of course, hinge on the impact of the rising intensity of Covid-19 third wave on Pakistan’s international trade. Last year, after the first attack, exports had plummeted by almost 32 percent while imports had fallen by 15 percent. However, remittances continued to grow with an increase of 7 percent. In fact, this was the first quarter with a near zero current account deficit. Overall, reserves continued to grow by over $1 billion, facilitated by the fall and rise in imports and remittances, respectively.

The current quarter has, in fact, started well with the successful flotation of bonds in the international market of $2.5 billion. This was timed to coincide with Pakistan’s reentry into the IMF programme. Hopefully, the year will end with the country’s foreign exchange reserves somewhat over the minimum safe level of import cover of three months.

What are the IMF’s expectations? The Staff Report after the second to fifth review was released almost two weeks ago. For 2020-21, it projects a higher growth in exports and lower growth in imports and remittances. Consequently, the current account deficit is significantly overstated. However, with a healthy financial account surplus, the report also expects the foreign exchange reserves by end-June at $14.4 billion, equivalent to almost three months of import cover.

The fundamental question is what the outlook will be for the external balance of payments in the medium-term, say, up to 2023-24? The IMFs Staff Report contains a set of these projections up to 2025-26. These projections reveal IMF’s expectations about the future overall debt repayment capacity of Pakistan. Net repayment to the IMF will commence from 2022-23 onwards, after the end of the Program in September 2022.

Despite the current wave of some optimism, the IMF has a sombre view of the prospects for Pakistan. It expects the foreign exchange reserves of Pakistan to remain barely over the safe level of three months import cover during the next three years. The last IMF programme which ended in 2016 left Pakistan with healthy reserves equivalent to four and half month’s reserve cover of imports. Of course, they were eaten away by more than half by the time of departure of the previous government in 2018.

Why is the IMF cautious about the prospects for Pakistan’s balance of payments? Perhaps the biggest reason for this lack of optimism is the impending peak in Pakistan’s external debt liabilities, especially on the Government account as shown below:

===================================
          Projected Amortization of
                    Government Debt
                        ($ billion)
===================================
2020-21                         9.7
2021-22                        12.1
2022-23                        12.7
2023-24                        15.0
===================================

Cumulatively, over the next three years the repayment of government external debt will approach the colossal magnitude of $40 billion. Consequently, the IMF is projecting that there will be a negative net inflow into the Government account.

The Fund sees that the only way the current account deficit of up to 2.5 percent of the GDP each year can be financed is by large and rapidly growing non-debt creating capital inflows. Foreign direct investment is expected to rise cumulatively by as much as 122 percent between 2020-21 and 2023-24 and portfolio inflows by as much as 150 percent during this period. There is a high downside risk that if this does not happen then reserves could fall well below the minimum safe level.

It is perhaps not surprising that the London Economic Intelligence Unit has identified three Asian countries, namely, Sri Lanka, Mongolia and Pakistan, as the most prone to a very difficult balance of payments situation.

Has the government taken the IMF projections of the balance of payments seriously? Instead of the IMF projection of growth in exports of only 18 percent from 2020-21 to 2023-24 is a plan being put together to boost exports cumulatively by 50 percent or so during these years? Otherwise, will the IMF be asked to come back not much after its departure in September 2022?

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2021