A single line hint “the Central Bank may have to make a difficult choice, if large external imbalances persist” dropped by the State Bank of Pakistan in its annual report of 2005-06 economy has drawn extreme but conflicting views from the economists and businessmen.

“What this difficult choice for the central bank can be?’’ There is a possibility of further tightening of the monetary policy to discourage consumerism and depreciation of rupee’s exchange value. What are the implications, the economic, financial, social and political fall out of such an option that State Bank also considers “a difficult choice”.

“The International Monetary Fund (IMF) may be asked to share Pakistan’s foreign exchange management responsibility if foreign inflows fail to match the extraordinary trade deficit and the resultant imbalance in current account’’ is one view. Mr Akbar Zaidi, a noted economist, says that IMF and the World Bank may be engaged but “only after the elections have been held and not before’’.

Dr Ashfaq Hasan Khan, a government advisor, accepts that widening imbalance in external sector is a challenge but says that it will be faced with right policies to augment foreign inflows. He is confident of a net increase in foreign exchange reserves at the end of the day. “We faced successfully much bigger challenges in the near past and will overcome this challenge too’’, he said from Islamabad.

Businessmen are surprised over a press release issued by the State Bank of Pakistan on Tuesday which suggests that all concessions and incentives offered by the government by way of Rs137 billion refinance, Rs22 billion loans swapping and about Rs11 billion rebates have been misused. Instead of showing improvement, the textile exports are showing negative results in the current fiscal year. “Too little and too late’’ remarked a textile industry leader on the concession package offered to them which, he said, has failed to push up exports.

A retired bureaucrat blames rising consumerism now being officially promoted, at the cost of bank money and remittances, for bringing Pakistan’s economy under the direct impact of the much feared double edge sword—the inflation and ever widening current account imbalance.

Released with inordinate delay early this month, the report in its assessment of remaining half of the current fiscal year, notes with concern risks to the economy. One is the inflation that ``may remain above 6.5 per cent annual target ‘’ and another is widening external current account deficit. Extraordinary trade deficit of over $12 billion in the last fiscal year, which is showing no signs of respite in the current fiscal year, is the main cause of widening current account imbalance.

The State Bank wants the government to reduce import expansion and to boost exports which is easy to say but difficult to do.

There are two ways to deal with this situation. One to continue the tight monetary policy and to further increase the interest rates but then the central bank cannot overlook the “inherent danger of excessive tightening that may hurt the growth”. “A further rise in interest rates could risk considerably slowing the growth momentum of the economy’’, the report apprehends, and the second is a sharp depreciation in rupee value that is fraught with a frightening consequence of economic de-stablisation.

The State Bank’s hint at making a difficult choice comes in context of these two difficult options which has thrown wide open all speculations as to what direction the national economy is taking. Mr Zaidi considers the last five years after 9/11 a period of missed opportunities. “Our foreign exchange reserves are stagnant at $12 billion though there have been about $20 billion remittances during this period, ’’ he said.

Mr Zaidi has a point because a casual glance of the foreign exchange reserves of emerging markets in Pakistan’s neighbourhood shows that these are constantly on the rise. Chinese foreign exchange reserves are now close to a trillion dollars from only $168 billion in the year 2000. , China is amassing $17 billion every month in its reserves. China relies heavily on its expatriates all over the world to contribute to the economic growth of the mainland.

India too has mobilised expatriate Indians who are making contributions in the economic development of their country. India was alarmingly bankrupt in foreign exchange reserves in 1990-91, but now has about $170 billion reserves.

Singapore has $129 billion reserve, Indonesia $39 billion, Malaysia $79 billion, Philippines $18 billion and even tiny Viet Nam about $11 billion.

Pakistan benefited from the 9/11 outfall and managed to attract substantial foreign exchange inflows that helped it build up $13 billion reserves in just two years. But for past two-three years, these reserves are stagnant while import bill, and financial outflows in services is increasing.

“Privatisation of the PTCL, the Habib Bank and the UBL helped to a great extent in plugging foreign exchange hole last year’’ the retired bureaucrat said who warned that once the foreign investors start repatriating their profits back home the real problem would hit Pakistan. This year, the OGDC`s global depository shares (GDS) fetched more than $800 million. The Privatisation Commission is in the process of finalising transaction of GDS of four other institutions in near future.

Dr Ashfaq Hasan disclosed that the Foreign Direct Investment (FDI) inflow in first four months of the current fiscal amounts to $1.1 billion. His estimate for the fiscal 2006-07 is about $4..5- 5 billion.. Remittances are picking up and are expected to give about $4.6- 5 billion. At the end of the year, he is confident, Pakistan’s reserves would show some improvement.

On the trade side, imports are expected to show a slow down because of lowering of international oil price. “The import of textile and cement machinery is now less,’’ Mr Ali Reza, President of the National Bank of Pakistan, disclosed. According to him Pakistan investors have opened letters of credits after booking import orders and for some time there will be less pressure.

However, the latest estimate of the Ministry of Commerce is that the current fiscal would end up with a trade deficit of $12 billion.

Exports, however, remain the worrying concern for the State Bank, businessmen and the government. “The competitive export market has taken a toll in terms of lower prices as well as a fall in export volumes of some products,” the State Bank report observes on the basis of analysis of export in last four months which is down by more than 10 per cent.

The State Bank does not support subsidies to support export as it “carries significant economic cost’’ and instead pleads for policies that should reduce cost of doing business by improving infra-structure, enhance labour skills, strengthen managerial capacity, reduce unit labour cost and provision of unhindered energy at competitive rates.

But this is exactly what textile exporters are asking and pleading. Textile leaders’ contention is that their products in USA and Europe have been out priced because the energy and labour cost in India, China and Bangladesh is much lower and that in addition there are subsidies being offered in financial cost and exemption from taxes. “Textile export is hardly 15 per cent of total Chinese export and about 30 per cent of Indian exports,’’ argues Aziz Memon, a leading garment exporter. But in Pakistan textile is 60 per cent of total exports, 11 per cent of the GDP and it generates almost 40 per cent of urban employment. A slight slump in textile business shakes the national economy in Pakistan.

India will have to struggle a bit to absorb any setback on textile business and China can easily adjust.

Mirza Ikhtiar Baig, Chairman of Textile Committee in the Federation of Pakistan Chambers of Commerce and Industry, has presented a comprehensive paper showing production cost comparison of Pakistan with neighbouring countries to establish that there is a case for giving a hard look to energy tariff, tax rates and impact of non-revenue taxes on the textiles and on business.

Prime Minister Shaukat Aziz and Commerce Minister Humayun Akhtar Khan are reported to have held several meetings with textile leaders and of other industrial sectors. The government is expected to offer a short-term salvage package to the industry in next one or two weeks.