ARE dark clouds beginning to hover on the balance-of-payments horizon? Worker remittances to Pakistan have hit an air pocket in July, dropping over 20 per cent from a year earlier. Since the launch of the Pakistan Remittance Initiative in mid-2009, worker remittance inflows have recorded robust annual increases, growing from around $6.5 billion in 2007-08 to $19.9bn in 2015-16. Over this period, these inflows have increased at an average of 15.3pc each year, rising faster than Pakistan’s merchandise exports. At 7pc of GDP, the volume of remittances has grown to nearly the same level as goods exports from Pakistan, highlighting their outsized importance in the country’s balance of payments.

Contrary to the focus in the media on the dip in the July numbers, the decline in remittance inflows for the month is not restricted to Saudi Arabia — the largest single source country of foreign exchange under this head. Inflows from the US, UK as well as other GCC countries have all depicted a sharp downward trend for the month. While the collapse of oil prices in the past two years has led to a general anticipation that it will begin to impact Pakistan’s remittances flows at some stage, the wider pool of countries from which inflows have declined could indicate a more systemic set of factors, beyond the oil price alone.

July is unlikely to be a blip, or an outlier, as the State Bank appears to be hoping, however. The fall in oil prices has had a deep financial impact on Saudi Arabia and its oil-exporting GCC partners — but it is not the only source of vulnerability. The Yemen military adventure is costing the kingdom quite heavily too. As a result of the double whammy, Saudi Arabia is expecting to post a budget deficit of around $120bn this year, while its foreign exchange reserves are thought to have depleted by at least one-third from around $600bn.

A misplaced policy framework is leading to external vulnerability.

A potential decline in remittances would compound the effect of the continuous fall in Pakistan’s other main foreign exchange earner: exports. Export earnings have been on a consistent declining trend for the past two years, having fallen a cumulative 17pc in US dollar terms over this period. Adjusting for the boost given to the country’s exports by the European Union’s GSP Plus regime during this period, the decline in exports is even sharper.

While weaker global economic conditions and softer international commodity prices are partly to blame, shifting the blame away from endogenous, policy-related factors is disingenuous as well as dangerous. Pakistan’s current policy framework is anti-manufacturing and anti-export in particular. Withheld refunds, advance taxes, additional levies such as the Gas Infrastructure Development Cess, the withdrawal of the zero-rated sales tax regime, in combination with an overvalued exchange rate, have played havoc with the export sector. As a result, export quantities, and not just unit prices, have fallen with the consequences most evident in Pakistan’s main textile and clothing categories.

Without a change in policies — and attitude of policymakers — it is highly unlikely that the export situation will be temporary and reverse by itself. A casual, lackadaisical nonchalance pervades the top leadership of the ministries of finance and commerce with regard to Pakistan’s falling exports — percolating right up to the prime minister himself. For a supposedly pro-business government, this hands-off and unconcerned attitude is beyond shocking — and is also testament to the lack of understanding and interest of parliament in holding economic policymakers accountable.

With Pakistan’s exports on ‘auto-pilot’ and no one taking ownership or steering the ship, the finance minister has instead focused on external borrowing to bridge the country’s foreign exchange needs. For 2016-17, he has outlined plans to borrow over $4bn on commercial terms from market sources via sovereign bonds and commercial bank borrowing. For most well-managed economies, exports of goods and services provide a large part of the external financing needs. In Pakistan’s case, exports now pay for only 46pc of our imports.

Another important element of external account stability is inflow of foreign direct investment. This too has declined in the past few years to rock-bottom levels, especially from countries other than China. While there are signs FDI is picking up moderately, and there is genuine investor interest on the back of excitement regarding the China-Pakistan Economic Corridor (CPEC), the inflows from this source are far below potential or what is required to underpin the balance of payments.

The contraction in Pakistan’s ‘core’ non-debt foreign exchange inflows may not impact the external account in the current fiscal year — or even the next (depending on international oil prices). For the interim, the debt-financed strategy will keep the external account well-funded. However, the commercial borrowings being racked up— including for CPEC-related projects –are relatively short-term in nature. Their repayments will mostly be due within a year or two from disbursement. In addition, these repayments will be occurring at the same time as a hump in Pakistan’s repayment of previous external obligations to the IMF, the Paris Club and sovereign bond investors. Add to this the non-financed component of imports under CPEC projects, which are set to rise for the next two to three years, and Pakistan’s external payment liabilities are set to increase sharply in the near future.

If international oil prices also increase during this period, as the current excess supply is worked off and under-investment begins to impact longer-term supply, we could have the makings of a perfect storm for Pakistan’s balance of payments a few years down the road. The country will then rue the lack of understanding of the issue and inattention by today’s policymakers to Pakistan’s exports.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

Published in Dawn, August 19th, 2016