November 20, 2006	Monday	Shawwal 27, 1427

FOREIGN trade figures for October indicate a clear reversal of current trends as compared to the same month last year. Last month, imports declined at a faster rate(8.8 per cent)than exports( 3.2 per cent) as compared to October 2005. And the comparative data shows trade deficit falling by 15 per cent to $849 million from $1 billion.

However, the trade deficit for first four months of current fiscal had touched $4 billion against $3.398 billion for the corresponding period of the last year.

Officials say, exports have been hit by slowing down of textile sales and imports are down because of sharp fall in oil prices, lower demand for textile machinery and cheap inputs of industrial raw materials.

Whether the foreign trade trends witnessed in October will stabilise over rest of the year and reduce the otherwise widening trade imbalances has yet to the seen. The government is working on a new strategy to boost textile exports which is expected be announced soon.

Meanwhile, as witnessed last year, much of the current account deficit would be taken care of by the capital inflows including rising workers remittances.

Leading multilateral agencies expect that Pakistan will be able to secure an additional $2 billion in the second half of 2006-07 from external sources that will help reduce external vulnerabilities.

However, they have cautioned the government on the level of foreign exchange reserves which, according to some analysts, are just enough only to meet 13 weeks of imports. These analysts now maintain that net foreign reserves stand at $8.5 billion, if the country’s liabilities and future contract obligations are taken into account.

Former Finance Minister Sartaj Aziz believes that the risks are serious but he does not see a crisis situation. Pakistan’s foreign exchange reserves, now stand at $12 billion including $2 billion held by the private banks.

A meeting of the IMF board will be held later this month to give its assessment of the country’s economy, based on discussions the IMF officials held with Pakistani authorities in August this year under article IV annual consultations.

“But in our view the current level of foreign exchange reserves ($10 billion being maintained by the central bank and the remaining $2 billion by the private banks) are adequate in terms of funding Pakistan’s imports”, said Mr. Henri Lorie, the IMF’s senior representative in Pakistan.

The level of reserves, he said, was satisfactory and was sufficient despite $5-6 billion current account deficit.

“But these reserves should be further increased”, he said adding that the government was conscious of the fact that the current account deficit should not increase beyond a point.

However, Pakistan is said to have been told by the multilateral agencies that increase in the current account deficit always created vulnerability. They have also reportedly asked the government that monetary policy and the fiscal policy should be looked into to avoid unforeseen problems that ultimately put pressures on the economy.

These agencies did not want the government to restrict imports as many people believed. “There is a slow down in the growth of imports”, an official of a multilateral agency said.

But he was concerned over the slow export growth during the last few months particularly that of the textile sector. “There is a competition in the international market with China, India and even Bangladesh which are getting their significant shares” in EU and US markets.

Pakistan has been advised to become a “reliably exporter” for the quality textile products. The real challenge, he said, has been posed by India and China which needed to be adequately met by the Pakistan’s textile sector.

He said Pakistan needs to build its foreign exchange reserves primarily by increasing its exports. He also believed that expected privatisation proceeds, more foreign direct investment (FDI) and increasing foreign remittances could help the government to have sufficient level of foreign exchange reserves. “But the issue of current account balance needs to be taken into account seriously if things are to be seen in the longer prospective”, he said.

Nevertheless, Secretary Finance Tanwir Ali Agha said Pakistan was maintaining foreign exchange reserves at the level of three and half months of imports during the last two year. And there is no vulnerability being faced by the government as our reserves are at a comfortable level”, he said. Some time, he said, there was some delay in foreign flows called as ‘seasonality’.

In the second half of the year, new disbursements would be made by the bilateral partners and the donor agencies. “And we would like that when this financial year is closed, we should have reserves which are sufficient for the imports of three and half months time”, he added.

Agha said that Pakistan was expecting $1.5 billion plus during the remaining part of 2006-07 which included 90 percent to be offered by the World Bank and the Asian Development Bank (ADB) and the balance by the bilateral donors.

Further, he said, negotiations were currently being held on national trade corridor which is expected to bring $300 million from the World Bank and the ADB. It will further help improve Pakistan’s reserves position. “We are also targeting non- debt creating foreign flows”, the secretary finance said.

Prime Minister Shaukat Aziz, his advisor on finance Dr. Salman Shah, and Economic Advisor to the ministry of finance Dr Ashfaque Hasan Khan had been saying that Pakistan’s reserves position would remain comfortable as long as these are sufficient for six months of imports.

According to the latest ADB economic Update, the burgeoning current account deficit, continuing high inflation, and latent power shortages are potential risks to the country’s medium-term economic prospects.

It also said that import growth is likely to decelerate in FY2007, though the projected healthy GDP growth will be realised and the substantial increase forecast for investment will sustain high demand.

But the import growth is expected to remain still vigorous at 15.0 per cent. On the other side, taking account of projected strong expansion in global trade, continued safeguards specific to the People’s Republic of China (a major competitor) imposed on certain garment and textile items by the United States and European Union, and the lower anti-dumping duty on Pakistan bed linen imports set by the European Union, total exports in FY2007 are expected to rise by 13.0 per cent.

With these main determinants, the current account deficit is now projected to increase to $7.9 billion, or 5.5 per cent of GDP, well above the 3.1 per cent forecast in ADB out look of 2006.