A fragile balance of payments

The statistics on the external balance of payments of Pakistan in 2023-24 were released last week by the SBP (State Bank of Pakistan). These statistics reveal a fragile position of Pakistan with regard to the external transactions, both in the current and financial accounts.

Of course, there has been much commendation of the extremely small size of the current account deficit. It is the lowest after 2010-11, when there was actually a small surplus. The year has ended with the deficit at only $681 million, not even equivalent to 0.2% of the GDP.

This would certainly have been a reason to celebrate if it had been achieved on the back of spectacular growth of exports and/or remittances. However, exports of goods and services have shown a moderate 9.6% increase. If the upsurge in rice exports of almost 75% is excluded, then all other exports combined have achieved a growth rate of only 5%. In fact, there has been a decline in textile exports of over 2%.

Workers’ remittances have been more buoyant, with a growth rate approaching 11%. But much of this growth is due to the ‘low-base’ effect. During 2022-23 the wide divergence between the open market and the official exchange rate had led to a big diversion of remittances to the hundi market.

This led to a drop in remittances received by the banks by over 12% in relation to the level achieved in 2021-22. It is worth noting that there has only been a partial recovery in remittances in 2023-24. They are still below the level of 2021-22 by over 3%.

The real reason for the big containment of the current account deficit is the big cutback in goods imports. They are virtually at the same level as in 2022-23, when strong physical controls were in place to restrict imports. The result was an over 26% reduction in imports.

This process has continued with perhaps the same intensity in 2023-24, with large cutbacks in imports of transport vehicles, mineral products, electrical appliances, medicines, etc. This has restricted the growth rate of the manufacturing sector and led to higher prices due to shortages.

The end result is an outcome, which is contrary to expectations. The rupee has been remarkably stable at a time when Pakistan’s foreign exchange reserves have been at relatively low levels. Believe it or not, the real effective exchange rate of the rupee is close to 100. At the start of 2023-24 it was down to 87. Indeed, credit must go to the State Bank of Pakistan for this achievement.

During the tenure of the IMF Stand-by Facility up to April 2024, the IMF had been insisting that the exchange rate should be market-based. The SBP was successful in avoiding any real depreciation of the rupee despite this pressure. The unanswered question is what impact did the appreciation of the rupee have on exports?

Turning to the financial account of the balance of payments, there is fortunately a larger surplus of $4,701 million as compared to a deficit of $468 million in 2022-23. However, the net inflow of foreign investment is higher by $1,600 million only. The valorous efforts of the SIFC (special investment facilitation council) have clearly not yet led to a quantum jump in foreign investment inflows.

The relatively large improvement is in net inflows to the government account. In fact, disbursements have actually even been smaller than the level in 2022-23 by $1,295 million. The net inflow has been enhanced by a big decline in amortization payments. They have come down sizably from $11,660 million in 2022-23 to $6,735 million in 2023-24.

The big fall in debt servicing of external debt needs to be explained. The Ministry of Finance had budgeted external debt repayment in the budget documents of 2023-24 at $9,165 million, net of rollovers. Similarly, the projection by the IMF at the start of the Stand-by Facility was amortization of $10,488 million in 2023-24.

However, the actual amortization has been much smaller in 2023-24 at $6,735 million. Also, it is $4,925 million less than the actual total amortization payment in 2022-23. The fundamental question is how this quantum of reduction in debt repayment has been achieved? Have there been some more rollovers than those anticipated at the start of the year?

The bottom line is that a surplus of $2,816 million has been achieved in the balance of payments in 2023-24, as compared to a large deficit of $4,218 million in 2022-23. Along with a net inflow of $2,154 million from the IMF, there has been an overall increase of $5,016 million in foreign exchange reserves.

However, there is need to recognize the underlying fragility of the balance of payments.

The surplus was achieved by a sizeable cutback in imports and a big reduction in amortization payments.

The presence of the IMF Stand-by Facility led to an additional inflow of $3 billion from the Fund and $2 billion from Saudi Arabia.

What is the outlook for 2024-25? The IMF Staff Report of May 10, 2024, at the end of the Stand-by Facility, has projected the total external financial requirements for 2024-25. The current account deficit is projected at $4,554 million, at less than 1.5% of the GDP, but almost $4 billion higher than the actual level in 2023-24.

Amortization payments on external public debt are estimated at $11,234 billion in 2024-25. The financing includes the combined flotation of Euro/Sukuk bonds and new loans from international commercial banks of $6,500 million. This large amount is anticipated even though in 2023-24 there was literally no inflow whatsoever from these private creditors.

The Fund has apparently agreed to a 37-month Extended Fund Facility (EFF) with Pakistan. Approval from the Executive Board is awaited. The on-going visit to China by the Finance Minister at this time tends to indicate that Pakistan has perhaps been asked to obtain some reprofiling of payments to the Chinese Government, international banks and the Chinese IPPs.

We await the finalization of the new EFF with the IMF. It promises to be perhaps the toughest ever in terms of the performance criteria and structural benchmarks. The federal budget of 2024-25 already has included the heaviest dose of additional taxation.

Electricity tariffs have recently been raised substantially. Also, the IMF has projected 16% depreciation in the value of the rupee in 2024-25, which will also add to inflationary pressures. Overall, 2024-25 promises to be an eventful year.

Copyright Business Recorder, 2024