External sector crumbling

Published September 1, 2016
The writer is a member of staff.
The writer is a member of staff.

A STRING of bad data is casting a cloud over the external sector outlook precisely at the time when Pakistan prepares to exit the Fund programme. The three pillars of the external sector — remittances, exports and foreign direct investment — have all shown steep declines in the first month of the new fiscal year. This could be bad news if the trend were to continue.

Remittances have been the backbone of the external sector for more than half a decade now, registering constant increases even as the countries from where they originate have gone through deep crises. But in July they fell by 20pc where the same figure for last year was less than 1pc.

Granted some of this drop can be attributed to Brexit-related problems, such as the depreciation of the pound sterling. But all countries have shown steep declines: UK down by 38pc, US by 33pc, Saudi Arabia by 30pc, UAE by 20pc, and other GCC countries by 14pc. Between them, these countries alone account for almost 90pc of our total remittances.

Exports similarly fell by just over 14pc in July compared to the same month last year, as per State Bank data. This is a continuation of a trend that began in July 2013. Since then, every July has shown declines, totalling to almost 30pc over the three years since. We have heard much talk from the government about tackling this trend and spattering of a few measures here and there, but nothing more.

Foreign direct investment makes for a slightly more dismal read. On the face of it the numbers look spectacular. Apparently, we saw a 125pc increase in foreign investment in July this year! But look a little closer and you’ll realise something. Of the $63 million that came in during the month as foreign investment, $54m was in the stock market. Where it really counts, inflows of foreign direct investment, there was a drop of 48pc.


So where is the game plan for “accelerating competitiveness and business climate reforms”, you might well ask?


One month’s data may not be bad news if it was seasonal or accounted for by temporary circumstances. But the situation that lies behind these declines is neither. It is reasonable to say that these declines are here to stay. To some extent this is also to be expected. After all, countries around the world are seeing declines of this sort given the deterioration in the world economy, and the declining price of oil, which has created dire economic circumstances in key countries of the advanced industrial world and the oil rich kingdoms of the Middle East.

The reason this is more worrying than usual are twofold. First, this is the year we exit the IMF programme, and from here on till the next government inevitably enters a new programme, we are on our own. So the kind of ideas and thinking that the government is bringing to bear on this situation is important.

How is the government seeing the situation on the external sector? The words of the finance minister in the latest budget speech provide a clue. Here he is, for instance, talking about the foreign exchange reserves: “Alhamdolillah, the level of $21.6 billion has been achieved, which is a new historic record. And this way we have guarded the economy from frequent external fluctuations.”

It would be a good idea to recall here that the finance minister from the previous government was also boasting of building “record high reserves” in 2011. Here is what he said in the budget speech that year: “[T]he country has accumulated historic reserves of $17.3bn and the rupee has displayed stability.” Two years later, Pakistan was once again preparing its approach to the IMF. So much for “record high reserves”.

Back to Mr Dar. Here he is talking about exports, after noting the declines that set in since his government came into power: “The main reason for this decline is global commodity prices.”

Incidentally, when detailing the reasons behind declining exports, the IMF has a little more to say. Here are the reasons they give in the last review — “lower commodity prices, security and business climate challenges, and the continued appreciation of the real effective exchange rate”.

In his attached Letter of Intent, which details the challenges the government sees for itself and the steps it intends to take to meet them, the finance minister says “[t]he decline in exports and the need to promote private investment call for accelerating competitiveness and business climate reforms”.

So where is the game plan for “accelerating competitiveness and business climate reforms”, you might well ask? Considering this is being said in the last review of the programme, when exports have already put in a declining trend continuously for three years, one can be excused for thinking that the government is talking more and doing less.

The fact is, almost all of the government’s initiatives to reform governance and the economy have met with failure. These include but are not limited to the agriculture package of last year, the auto policy of this year, the banking transaction tax as a documentation measure, the effort to serve notices on non-filers of income tax returns and the tax amnesty scheme for traders.

Faced with such a comprehensive catalogue of failures, there is little left now but to go on about the “record high reserves” and CPEC. The latter has become some sort of holy grail in our public imagination, so thoroughly is the future of the country being cast in its light. Only the other day, Ahsan Iqbal insisted that CPEC is not just a game changer, but a “fate changer”. I wonder what’s next — perhaps a ‘destiny shaper’?

At the moment, CPEC is more of a mystery than anything else. The reality is described by those three lines that July data showed trending downwards. The failure to address that reality is what will decide whether the present moment is a “fate changer” or a “history repeater”.

The writer is a member of staff.

khurram.husain@gmail.com

Twitter: @khurramhusain

Published in Dawn September 1st, 2016

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