Level of external inflows

The level of external inflows into Pakistan is of vital importance in ensuring a ‘safe’ level of foreign exchange reserves and ensuring relative stability in the value of the rupee.

There are two types of external inflows. The first type is inflows into the current account of the balance of payments. These are exports of goods and services and workers’ remittances.

The second type of external inflows constitutes those that are recorded and highlighted in the financial account of the balance of payments. These include foreign direct and equity investment, loan disbursements into the government account and to the private sector in Pakistan.

There is also another inflow. This is the receipt of grants from foreign donors into the capital account of the balance of payments. However, this is generally a very small magnitude.

We take up first the export performance in the first four months of 2024-25. The exports of goods and services combined have shown a moderate growth rate of 8.6 percent. Exports of goods and services respectively have demonstrated, more or less, the same rate of growth.

The big increase in exports has been of rice. Pakistan has benefitted from the earlier cessation of rice exports by India, which have now been resumed. The performance of textiles’ exports has been disappointing, with the growth rate of 5.1 percent. Pakistan should have taken advantage of a troubled economic situation in Bangladesh.

The worrying development is the widening of the trade deficit in goods, because of a significantly faster increase in imports of almost 13 percent, as compared to 8.6 percent in exports. Consequently, the trade deficit is larger by almost 19 percent.

Fortunately, there is some good news on the front of workers’ remittances. They have demonstrated a handsome growth of 34.6 percent. This is probably a reflection of the stability of the rupee and the absence of a significant difference in the exchange rate in the official and hundi markets.

However, there is a need for a note of caution. The growth rate in July 2024 was 47.6 percent, which has tapered off to 23.7 percent by October. This path of decline in the growth rate is observed in remittance inflows from all the three major sources’ viz., the Kingdom of Saudi Arabia, the United Arab Emirates and the USA.

Turning to capital inflows, in the financial account of the balance of payments, the first look is at the level of foreign direct private investment. The inflow is USD 904 million in the period, July to October. This represents a healthy growth rate of 32.4 percent over the depressed level in 2023-24.

Overall, in the first four months, foreign private investment is still cumulatively less than USD 1 billion. The expectations were that the SIFC would be able to attract a quantum jump in foreign investment. Clearly, risk perceptions of the foreign private sector remain high. They may be further augmented by the political process of confrontation and major acts of terrorism in the country.

We come now to perhaps the most important and large capital inflows into the country in the form of disbursement of loans to the government by multilaterals, bilaterals, international commercial banks and by flotation of bonds.

The inflow of loans after accounting for amortization payments has actually been negative at USD 729 million, as compared to a positive net inflow of USD 1,315 million from July to October 2023. Last year, there was a big increase in inflows following the commencement of the IMF Stand-by Facility.

The information contained in the monthly report of the Ministry of Economic Affairs on Monthly Disbursement of Foreign Economic Assistance has also been analysed. This report is available for the first quarter of 2024-25.

The annual target of external assistance is USD 19,393 million. This includes USD 11,693 million of new inflows, and roll-over of USD 7,700 million of deposits by China and Saudi Arabia with the SBP.

The extremely worrying magnitude is that in the first quarter of 2024-25 fresh inflow of loans worth only USD 1,308 million has taken place. This is barely 11 percent of the annual target.

The surprise relates particularly to inflows from multilateral agencies like the World Bank, Asian Development Bank and the Islamic Development Bank. The annual target, based presumably on commitments, is USD 4,578 million. The amount received in the first quarter is only 10.6 percent of the annual target, at USD 483 million.

Further, the plan is to float USD 1000 million of bonds and obtain USD 3,779 million of fresh loans from foreign commercial banks. No bond has been floated yet and the amount of loans received in the first quarter is only USD 200 million.

There is a growing apprehension that foreign lenders have not yet gained confidence in financing Pakistan. This is despite the presence of over USD 11 billion in foreign exchange reserves with the SBP and the umbrella of a new Extended Fund Facility with the IMF since September. This leads to the conjecture that the unscheduled mission by the IMF Staff to Pakistan earlier in November was due to great concern about the very limited inflow of external financing into Pakistan.

The IMF Staff Report of September quantifies the external financing requirement at USD 18,813 million of Pakistan in 2024-25. Clearly, this is beginning to look like an unattainable target given the low level of inflows in the first quarter. Further, rollovers, especially from China, may be difficult to realize in the required period.

Pakistan remains one of the biggest borrowers from the IMF. Among the over hundred countries that have outstanding loans with the Fund, Pakistan has the fourth-highest outstanding loan with the IMF after Argentina, Ukraine, and Egypt. The scheduled Staff review mission in March 2025 will be vital from the viewpoint of the future of the IMF Programme.

Copyright Business Recorder, 2024