KARACHI, June 21: The sale of 26 per cent share of Pakistan Telecommunication Company Ltd. (PTCL) for about $2.6 billion will help Islamabad improve its balance of payments in the next fiscal year.

Pakistan saw a balance of payments deficit of $103 million in 10 months of this fiscal year though its current account deficit was much larger — a whopping $1.156 billion. During the same period of the last fiscal year, the country had recorded a balance of payment surplus of $865 million and a current account surplus of $2.07 billion. What led the country to face this situation was a yawning trade gap on the back of a fast growing economy. The trade deficit based on fob value of imports and exports shot up to $3.818 billion in 10 months of this fiscal year — a more than fourfold increase over $811 million a year earlier.

The UAE-based Etisalat — the company that has bought 26 per cent PTCL shares — is supposed to deposit 25 per cent of the $2.6 billion bid money within 14 days after the issuance of a formal letter from the Privatization Commission. It is required to deposit the remaining 75 per cent amount within next 60 days. This means that Pakistan will receive the entire $2.6 billion from Etisalat in the first quarter of the next fiscal year i.e. between July-September 2005.

This huge inflow would partly offset the projected trade deficit of $4.16 billion in fiscal year July-June 2005-06 thereby also improving the current account and balance of payments position. Pakistan has projected about $2.7 billion current account deficit in the next fiscal year. Since the privatization of PTCL shares has fetched more than the expected amount of foreign exchange ($2.6bn against $1.5-$1.7bn), chances are that the country will meet the current account target even if the trade deficit rises beyond the estimated level of $4.16 billion.

A KEY ISSUE: PTCL’s privatization proceeds of $2.6bn into the banking system in the first quarter of the next fiscal year would increase overall money supply by around Rs156 billion. If 73 per cent of KESC shares are also sold out during this period to a local consortium of companies that should not lead to any significant increase in money supply because in that case the inflow of funds would not be from outside Pakistan’s banking system into it. It would simply be movement of funds from one component of the money supply in the country to the other component. However, the inflow of Rs156 billion in the shape of the rupee equivalent of the PTCL’s privatization will require efficient management of liquidity on the part of the central bank. Otherwise this could affect its inflation-containing efforts i.e. tightening of interest rates and containing growth of money supply.