February 4, 2006	Saturday	Muharram 5, 1427

KARACHI, Feb 3: Pakistan’s foreign exchange reserves have declined by $1.06 billion during the first seven months of this fiscal year.

According to the State Bank, the reserves fell to about $11.563 billion on January 28, 2006 from $12.623 billion at the end of June 2005. At the present level, the reserves cover imports of five months.

This fall in the reserves has taken place despite some foreign aid coming in the wake of October 8 earthquake, plus sizable privatization proceeds: the sell off Karachi Electric Supply Corporation (KESC) generated $167 million, and the buyers of 26 per cent shares of Pakistan Telecommunication Company Ltd (PTCL)made an initial payment of $260 million or 10 per cent of the total price of $2.6 billion. They have promised to pay $1.14 billion more before the end of the fiscal year in June and the remaining one billion dollar in nine six-monthly instalments.

The major post-earthquake foreign exchange inflows received so far include $200 million from the World Bank and $85 million from the Asian Development Bank.

A billion dollars decline in foreign exchange reserves indicates that the total outflow of foreign exchange from the country has been much larger than the inflows it has received.

There are four key sources of inflows i.e. exports, workers’ remittances, foreign direct and portfolio investment and borrowing from international financial institutions or countries or from the international debt market. The major sources of outflow are imports, external debt servicing, outward remittances of foreign exchange by multinational companies operating here, plus whatever Pakistanis spend on foreign travelling, on financing of education and medical treatment abroad.

Pakistan’s foreign exchange reserves are falling primarily, because its trade deficit has more than doubled during the first six months of this fiscal year to about $5.6 billion from $2.4 billion in last one year. And this deficit is likely to reach $9-$10 billion at the end of the year. Besides, the country would need at least $2-2.5 billion for external debt servicing.

Add to this, roughly $1-1.5 billion required to finance overseas travelling of Pakistanis plus foreign exchange required by foreigners living in Pakistan and multi-nationals operating here. So, at the end of the day Pakistan needs to generate $12-$14 billion during this fiscal year through all sources of foreign exchange inflows minus exports.

But in terms of balance of payments calculations, the trade deficit would not be too high. It could be somewhere around $7-8 billion at the end of the year. So, strictly speaking, Pakistan’s actual foreign exchange financing gap should be around $10-12 billion.

The country is going to receive $4 billion plus from overseas Pakistanis, maximum $3 billion through foreign direct investment, which also includes $1.14 billion that the buyers of PTCL are supposed to pay by June this year, and another $500 million in portfolio investment. All these combined come to $7.5 billion. Even if one takes the lowest estimate of the need for foreign exchange financing, Pakistan would still require at least $3.5-5.5 billion, provided it is assumed that it would not let its foreign exchange reserves fall.

During the recent visit of King Abdullah bin Abdul Aziz of Saudi Arabia to Pakistan, both sides have explored the possibility of Saudi Arabia offering $2 billion facility to Pakistan for importing oil from the kingdom on deferred payments. Similarly, Pakistan is going to receive more loans, aids and grants related to its post-earthquake reconstruction and rehabilitation work.

Besides, the government, intends to launch Eurobonds and privatize the state-run Oil and Gas Development Corporation (OGDC), is looking for issuing Global Depository Receipts (GDRs). Moreover, the country has been receiving some project loans from the international financial institutions, which it would continue to receive. So, depending upon how effectively the economic managers move to plug in the gaps between foreign exchange inflows and outflows, Pakistan should not face a severe balance of payments crisis during this fiscal year.

But its current account deficit may touch $5 billion mark against the last year’s $1.6 billion. The State Bank has projected current account deficit for this fiscal year at 4.4 per cent of the GDP which translates into $5.4 billion.

During the first five months (July-Nov) of the fiscal year 2005-06, the current account deficit stood at $2.846 billion against a deficit of $775 million in July-Nov, 2004. But overall balance of payments deficit remained below $900 million, against a year-ago deficit of $1.5 billion.