The balance of payments surplus increased to $3.5 billion in the last fiscal year from $1.3 billion a year before. And this happened amidst a record current account deficit of $7 billion.

Apparently, it is quite an achievement. But maintaining this level of BOP surplus might become too difficult during the current fiscal year. The reason is that the huge surplus of over ten billion dollars in the financial account that offset the current account deficit last year may not be obtained easily this year.

In FY07 the financial account surplus expanded to $10.1 billion from $5.8 billion in FY06 as foreign direct investment including privatisation proceeds rose to $5.1 billion from $3.5 billion and foreign portfolio investment shot up to about $3.3 billion from $964 million. (Of this private portfolio investment was $1.82 billion and public portfolio investment $1.47 billion).

The government is preparing to launch GDRs of National Bank and issue Eurobond at an appropriate time. Last year, it had raised $738 million through GDRs of Oil & Gas Development Company besides issuing a $750 million Eurobond.

How the politics in an election year and security situation after Lal-Msjid operation would impact the plans for raising portfolio investment is anybody’s guess.

The same can be said about generating enough foreign private portfolio investment this year which, in FY07, rose to $1.8 billion including $650 million GDRs of United Bank Ltd.

Whereas it seems doubtful if large inflows of FDI and portfolio investment would be available in this fiscal year to offset the current account deficit, the deficit itself might expand further.

The government has set the trade deficit target for this fiscal year at $12.8 billion, down from the actual deficit of $13.5 billion in the last year. The targets for imports and exports have been fixed at $32 billion and $19.2 billion respectively. But as international oil prices move up and domestic demand for fuel remains strong, it seems too difficult to contain imports at $32 billion, only five per cent above the actual imports last year.

What else might make it difficult to keep imports bill in check are high international prices of many imported food items including edible oil and milk powder and non-food items like iron and steel.

And achieving the exports target of $19.2 billion, up 13 per cent over FY07 exports is not feasible particularly in view of a sluggish performance of textiles, high inflation and tight monetary policy.

So, the trade deficit this year might exceed the target. The services account deficit, which stood above $4 billion in the last fiscal year might also increase. And remittances from overseas Pakistanis, which are expected to rise 20 per cent or so, would not be of great help to keep current account deficit low.

As Pakistan’s external sector grows in volume becoming increasingly significant in relation to GDP growth, the country requires having a long-term strategy for dealing with the external sector imbalances. Debts are also mounting. The larger foreign exchange outflows in debt servicing are exerting pressure on the balance of payments. In nine months of the last fiscal year, Pakistan had to dish out $2.2 billion for external debt servicing and it also got $1.1 billion of servicing rescheduled or rolled over.

In case of non-debt creating inflows like FDI, the repatriation of profit and dividend cause a draw down on the foreign exchange resources. In eleven months of the last fiscal year $762 million were remitted abroad on this account. Right now this kind of outflow is not creating much of a problem because foreign investors are also re-investing part of their earning which amounted $668 million dollars in nine months of last fiscal. But that is happening mostly in the sectors, which are witnessing a fast expansion now, like telecommunication.

But a few years down the road, when the expansion euphoria would subside, the volumes of reinvestment would decline and repatriation of profit and dividends would be higher than what they are today.

Reserves: As the balance of payments showed a sizable surplus in the last fiscal year, it led to a build-up in foreign exchange reserves and kept the rupee stabl.

Foreign exchange reserves rose by about $2.5 billion to $15.6 billion in FY07 from $13.1 billion in FY06. And the rupee lost only 0.3 per cent of its value against the dollar in the inter-bank market.

Whereas in FY06 the reserves were enough to finance 46 per cent of total import bill, in FY07 their adequacy to cover the import bill also rose to 51 per cent.

The rupee has so far remained stable during the current fiscal year but bankers fear that it might weaken for two reasons in due course of time.

They reckon that the external sector may not remain as sound and unlike in the past years, the central bank may not strengthen the rupee through net sales of foreign exchange to banks.

Inflation: In the new fiscal year, keeping inflation at 6.5 per cent also seems a real hard challenge, as the post-budget inflationary pressures indicate. Inflationary pressures are particularly visible in prices of food items.

Despite all the government efforts to contain price-hike, food inflation in the last fiscal year advanced at an average rate of 10.3 per cent, against 6.9 per cent a year before.

Advisor to the Ministry of Finance Dr Ashfaque Khan has said publicly that two million tonnes of wheat is lying with the hoarders. He has revealed that the hoarders have the audacity to park their trucks loaded with wheat even at petrol pumps and in the open areas.