Cracks in the economy: Reserves get breathing space as trade deficit contracts

Figures highlight challenges Pakistan faces to bring current account deficit to manageable level.

ISLAMABAD:

Pakistan’s trade deficit contracted marginally to $3.3 billion in the first two months of the fiscal year 2013-14 as exports outpaced the anaemic growth in imports – reducing the pressure on precious foreign currency reserves, but underlining deep structural weaknesses of the overall economy.

Latest data revealed by the Pakistan Bureau of Statistics on Tuesday, exports grew 3.7% in the July to August period of the fiscal to $4.1 billion, $145 million higher than the total value of goods exported in the corresponding two months of the last fiscal year. Imports in the period grew over half a percentage point to $7.4 billion, clocking in just $40 million higher over the corresponding period of the previous fiscal year.



As imports fell far behind the growth in exports, the trade deficit contracted 3.1% in the first two months of fiscal 2014. The deficit clocked in at $3.3 billion, lower by $105 million recorded in the corresponding two months a year ago.

The trade figures highlight challenges that the policymakers will have to overcome in order to achieve double-digit growth in exports aimed at restricting the current account deficit – the gap between external payments and receipts – to a manageable level. One of such challenges is kick-starting industrial activities in the private sector that is facing serious problems due to a severe energy crisis and crowding out of private sector credit due to massive government borrowings.

Pakistan and the International Monetary Fund (IMF) assessed that in the current fiscal year, the country’s exports will grow 11.4% while the growth in imports will remain at 7%. On this basis, combined with healthy projections in remittances growth, both stakeholders have worked out a current account deficit of just 0.6% of the gross domestic product.

The IMF’s and Pakistan’s fresh projection of the current account deficit is far below what the Ministry of Planning, Development and Reforms had forecasted in its annual plan in consultation with the State Bank of Pakistan (SBP). For this year, the current account deficit was estimated at $2.9 billion or 1.1% of the GDP by the planning ministry.

If the current account deficit widens far more than the projected level, it will create problems for the SBP to fulfil its commitments to the IMF. The central bank will face problems in maintaining an agreed foreign currency reserves level in addition to achieving quarterly targets of net foreign assets. Net foreign assets are defined as reserves held by SBP, excluding IMF liabilities due within one year and the central bank’s borrowing from commercial banks. The net foreign assets of the SBP, which were negative $2.437 billion by the end of June 2013, will have to be rebuilt and brought down to negative $141 million by end of March 2013, according to the memorandum of economic and financial policies of the IMF.

The net foreign assets target on the basis of projected 11% growth in exports and buoyant remittances may exert pressure on the SBP to arrange foreign exchange reserves, according to an internal commentary of a key economic ministry on the external targets agreed with the IMF.

The ambitious export projections have been made despite the fact that the balance of payments position will remain under pressure due to external debt repayments including repayments to the Washington-based lender IMF, declining trend in value of exports, rising international oil prices and weak financial inflows.

The monthly trade statistics depicted that the deficit contracted 8.3% in August over July due to a contraction in both imports and exports. Exports fell 4.8% in August over the last month as compared to 6.4% decrease in imports, according to the PBS.

On a yearly-basis, exports grew 4.8% in August over the same month of the last year, while imports dropped 3.1%. Resultantly, the trade deficit contracted 11.5%, according to the PBS.

Published in The Express Tribune, September 11^th,  2013.

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