KARACHI, Jan 11: Pakistan had to witness $746 million current account deficit in the first five months of this fiscal year against $1.62 billion surplus during the same period of the last fiscal year.
Provisional data released by the State Bank show that the country saw a current account imbalance as trade deficit jumped to $1.855 billion during July-November 2004 from just $25 million in July-November 2003. The trade deficit figures are arrived at using the free-on-board value of imports and exports.
During July-November 2004 imports stood at $7.563 billion whereas exports totalled $5.708 billion thus leaving a trade imbalance of $1.855 billion. During July-November 2003 imports had valued $4.987 billion and exports at $4.962 billion thus leaving a trade deficit of $25 million.
The import bill in the first five months of this fiscal shot up not only because of higher prices of petroleum products but also because Pakistan had to import larger volumes of them to fuel additional industrial and commercial activities. In five months to November 2004, large-scale manufacturing sector that covers production of almost all important industries grew by more than 17 per cent.
During July-November 2004, the import bill also shot up due to an across-the-board increase in imports of almost all categories from food and beverages to fertilizer and chemicals to plant and machinery.
The import bill of plant and machinery increased as not only the textile sector went on to enlarge and automate their production capacities ahead of the lifting of textile quotas from January 2005 but also because PIA paid for some aircraft it had inducted into its fleet.
The services account also witnessed a large imbalance of $1.281 billion during July-November 2004 as inflows under this account stood at $1.176 billion whereas outflows totalled $2.457 billion.
In July-November 2003, the imbalance in services account was just $156 million as inflows under this account were estimated at $1.207 billion and outflows at $13.63 billion.
The break-up of the services account for July-November 2004 is not available but July-September data provides a clue on why the services sector account has turned negative.
In July-September 2004, the services sector account saw a deficit of $618 million as inflows under this account totalled $840 million whereas outflows stood at $1.458 billion.
The factors responsible for this huge deficit included higher outflows on account of transportation, travel, insurance, royalties and licence fees. Pakistan had to spend $361 million on transportation account whereas its earning under this head was only $25 million. Thus, the net deficit in the services account due to chartering of vessels for imports, exports shipment was $336 million.
A constant growth in the volumes of external trade provides justification for this big deficit in transportation account but this can be reduced if state-run Pakistan National Shipping Corporation adds more vessels to its fleet and the private sector is encouraged to own and operate ships.
Another factor responsible for a big services' account deficit was a net outflow of $233 million on account of overseas travelling. Pakistan had to spend $279 million to finance personal and business-related travelling abroad of individuals and groups whereas it earned only $46 million under this account.
A higher spending on transportation and travelling as witnessed in the first quarter of this fiscal year is believed to have continued through the second quarter as well.
Hence the services account deficit in July-November 2004. The same applies on spending on insurance and royalties and licence fees paid to international organizations and their employees operating in Pakistan.
A key reason for higher net spending on travelling is that Pakistan has liberalized the rules that govern such spending. Net spending on both these heads was $39 million each in July-September 2004. And that is believed to have risen in July-November.
The imbalances in the trade and services were so large in July-November 2004 that the current account turned negative despite a strong build-up in current transfers. Net current transfers rose to $3.466 billion in July-November 2004, from $2.531 billion in July-November 2003.
Current transfers went up in the first five months of this fiscal year as Pakistan received $1.604 billion in workers' remittances or foreign exchange sent back home by overseas Pakistanis during this period, up from $1.488 billion in a year-ago period.
A big increase in foreign currency deposits held by the resident deposit holders also boosted current transfers. These deposits rose by $319 million in July-November 2004. In July-November 2003 they had grown by $93 million.
At end-November 2004 resident foreign currency deposits stood at $2.659 billion up from $2.340 million at the end of June that year. Foreign currency deposits held by resident Pakistanis and those foreigners residing in Pakistan increased much faster in the first five months of this fiscal year than in a year-ago period primarily because of the rupee depreciation.
The rupee lost 2.8 per cent of its value against the US dollar in July-November 2004 providing an incentive to those willing to maintain foreign currency deposits. Very low return on rupee accounts encouraged them further to do so.
The weighted average return on bank deposits stood at 1.21 per cent at end-November unchanged from its end-June 2004 level whereas on foreign currency deposits, the account holders earned a higher return.
