A fragile BoP

The figures on the balance of payments (BoP) of Pakistan for the first two months of 2021-22 have been released recently by the SBP. There is apparently a large surplus of $2773 million, which has contributed to the increase in foreign exchange reserves to the record level of $20,145 million at the end of August 2021. However, this is largely due to the receipt of SDRs of $2773 million from the IMF in August, as part of efforts by the IMF to support developing countries in the aftermath of the negative impact of COVID-19. Excluding this once-and-for all inflow, the balance of payments is barely in surplus of $69 million.

The current account has suffered a fundamental deterioration. From a surplus of $838 million in the first two months of 2020-21 it has been transferred into deficit of as large as $2360 million in the first two months of 2021-22. In fact, the month of August saw one of the largest deficits of $1.5 billion. Based on the magnitude in the first two months, it will not be surprising if the annual current deficit approaches $14 billion in 2021-22. This will be significantly above 4 percent of the GDP and much higher than the SBP's deficit projection of 2 to 3 percent of the GDP.

The objective of this article is to identify the different weaknesses that have emerged in the balance of the payments of Pakistan in the last few months. This will lead to a projection of the outcome in the full twelve months of 2021-22.

The first big negative development as highlighted above is in the current account. This was in surplus in the first two months of 2020-21, due to contraction in the volume of trade after the first attack of COVID-19. As the process of recovery commenced since the beginning of 2021, the current account has come under pressure.

Exports have increased by over 35 percent in the first two months of 2021-22. However, the growth rate of imports has been much larger at almost 68 percent. Consequently, the trade deficit has doubled from $3.4 billion to 6.8 billion. Initial estimates are that 80 percent of the increase in the value of imports is due to higher international prices and 20 percent because of large volumes. Therefore, the process of economic recovery is much less responsible for the upsurge in imports. A stage has now been reached where imports have risen to almost 250 percent of exports. Clearly, this is not a sustainable situation.

The balance of trade in services has also worsened. The deficit has increased by 41 percent. The growth in exports of 26 percent has here also been more than neutralized by 31 percent increase in imports, probably due to substantially higher freight charges.

Fortunately, home remittances have continued to grow even beyond the record levels attained in 2020-21 by over 10 percent. However, remittances from the largest source, Saudi Arabia, have started declining. The fall of 6 percent could intensify in coming months as international air travel expands. Also, some relaxation has been given for Umrah.

There has been a big improvement in the balance on primary income of 41 percent. However, the repatriation of profits by multinational companies in the country has apparently jumped up by 63 percent. This could be the result of faster repatriation in the face of a falling rupee.

Turning to the financial account of the balance of payments, the overall account shows a sizeable surplus. As highlighted earlier this is largely due to the receipt of almost $2.8 billion SDRs from the IMF. In addition, bonds of $1 billion were floated in July.

However, there are some negative developments here also. First, the disbursements of loans from multilateral, bilateral and other sources have declined by 48 percent. Are lenders waiting for the outcome of the sixth review of the EFF facility by the IMF which is due in the next two weeks?

Second, the level of amortization of the external public debt has declined by almost 31 percent to only $457 million in two months. This is only 5 percent of the annual amortization of public external debt of almost $9 billion in 2021-22. Clearly, the amortization payments will be substantially higher in coming months.

Foreign direct investment in net terms has taken a plunge of 20 percent from the already low levels observed in 2020-21. The outlook is not positive given the regional situation and somewhat negative perceptions about the security situation in the country. Net inflows have been smaller in sectors like electrical machinery and in financial business.

The balance of payments has been sustained by a net increase in public debt and liabilities of $4825 billion in the first two months. This has added over 5 percent to the outstanding public debt in such a short period of time. It has now approached $95 billion.

The outlook for the balance of payments in 2021-22 hinges crucially on the forthcoming sixth review of the IMF program. Earlier this year, Pakistan had agreed to wide-ranging and tough reforms. The change at the top in the Ministry of Finance led to a big reluctance to raise electricity tariffs, implement income tax reforms, raise the petroleum levy and so on.

However, the need for continuation of the IMF Program has increased as the external financing needs have multiplied in the face of a much larger current account deficit than anticipated despite a significant devaluation of the rupee. Now the SBP has had to step in and raise the policy rate.

We hope that both the Government and the IMF will show a spirit of accommodation, otherwise history may repeat itself and we may see the same outcome in 2021-22 as we saw four years ago in 2017-18.

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

Copyright Business Recorder, 2021