KARACHI, April 13: An increase in trade deficit coupled with a fall in home remittances and faster prepayments of external debt has started taking its toll on the pace of growth in foreign exchange reserves.
Gross liquid foreign exchange reserves saw a nominal fall in four weeks to April 3, 2004 instead of witnessing an increase. On April 3, forex reserves stood at $12.549 billion down slightly from around $12.566 billion on March 6.
This is in contrast to the trend seen in the first eight months of this fiscal year. (The reserves had shot up to $12.6 billion at the end of February from $11.087 billion at the end of July this year).
Data released by the State Bank show that the forex reserves held by the banking system came down to $1.586 billion on April 3 from $1.773 billion on March 6, 2004 showing a decline of $187 million.
But during the same time the reserves held by the State Bank went up to $10.963 billion from $10.793 billion depicting a growth of $170 million. Thus on balance gross forex reserves showed only a nominal fall of $17 million in four weeks to April 3.
Bankers point out that the a huge fall in the reserves held by the banking system means that there is a genuine demand for the dollar in the market, thanks to widening trade deficit and faster prepayment of corporate debts.
Both state-run agencies as well as corporates are repaying debts in advance to reduce their cost of borrowings. That is contributing to faster outflows of foreign exchange from the market thereby slowing down the pace of growth in the forex reserves held by the banks.
What has emboldened state-run agencies and private corporates to retire their external debts before time is the pro-rupee exchange rate and the precedence set by the present government by prepaying $1.17 billion expensive debt of Asian Development Bank in January 2004.
Rising trade deficit is also resulting in net higher outflows of foreign exchange. In March 2004, trade deficit shot up to $392 million with imports totalling $1.413 billion and exports at $1.021 billion. In February 2004, trade deficit was much lower at $233 million with imports totalling $1.139 billion and exports at $906 million.
The impact of this huge increase in trade deficit last month could have been mitigated had there been a substantial rise in home remittances or money sent back home by overseas Pakistanis.
Official figures for home remittances in March 2004 would be out in a couple of days. Bankers say they have handled more of home remittances in March than in February but they say that the quantum of increase has not been as high as the increase in trade deficit.
Home remittances have been on the decline during this fiscal year. In eight months to February 2004, net workers remittances fell to $2.513 billion from $2.849 billion in a year-ago period showing a decline of $336 million or 12 per cent.
Though the rising trade deficit because of growth in imports is resulting in higher net outflow of foreign exchange from the imports it is also contributing in economic recovery. The reason is import of plant and machinery and industrial raw materials is rising more rapidly than the import of food items or consumer goods.
Large scale manufacturing grew by more than 15 per cent in the first seven months of this fiscal year reflecting partly the impact of higher imports of plant and machinery and the items used in industrial production and value-addition.
Similarly prepayment of external debt by state-owned agencies as well as private sector corporates is sending a good message abroad about the financial health of Pakistan.
But the fall in home remittances and in foreign direct investment are bound to impact adversely on the balance of payments besides containing growth in foreign exchange reserves.
Foreign direct investment into Pakistan declined to $385 million in the first eight months of this fiscal year down 39pc from $631 million in a year- ago period.
