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The net foreign private investment into Pakistan declined to $204.4 million in five months to November 2003 from $477.3 million a year back, showing a fall of $272.9 million or 57 per cent. The country received $216.9 million foreign direct investment (FDI) in the first five months of this fiscal year.
But during this period, there was a net outflow of $12.5 million portfolio investment. That lowered the overall foreign private investment to $204.4 million. Last year during the comparable period, Pakistan had attracted $465 million FDI and $12.3 million portfolio investment.
Thus, the total foreign private investment had risen to $477.3 million. Foreign direct investment from the US, the UK and the UAE combined fell to $150.6 million in July-November 2003 from $380.5 million in July-November 2002, showing a decline of $229.9 million or 60 percent.
Meanwhile, net workers’ remittances have also come down to $1.463 in five months to November 2003 from $1.640 billion in a year-ago period, showing a fall of $177 million or 10.8 percent.
TROUBLES AHEAD: This simultaneous fall in foreign private investment and money transfers from overseas Pakistanis is going to take a final toll on Pakistan’s balance of payments. In fact, the country’s current account surplus has already shrunk.
It fell to $1.422 billion in four months to October 2003 from $1.597 billion in a year-ago period, showing a fall of $175 million or 11 percent, primarily due to lower remittances from overseas Pakistanis.
On the other hand, the capital account deficit has shot up to $682 million in July-October 2003, four times the deficit of $163 million seen in July-October 2002, basically because of reduced foreign private investment.
Both current account and capital account, which are two main components of the balance of payments, look set to see disturbing trends in future. Workers’ remittances may reach the target of $3.6 billion set for this fiscal year (July-June 2003-04) but would surely remain much below the FY03 level of $4.2 billion.
That, coupled with rising deficit in the services’ account, would contract the current account surplus beyond any doubt. Pakistan saw a huge $666 million deficit in its services account in four months to October 2003 mainly as it paid $340 million for shipment of external trade and $244 million to those travelling abroad.
The country’s expenses in financing overseas travel zoomed to this height from just $18 million in a year-ago period, as it withdrew restrictions on issuance of the foreign exchange by banks for this purpose.
That it did, in line with the ongoing liberalization of foreign exchange regime, on the insistence of the IMF. Whereas falling workers’ remittances and expanding services’ account deficit is to hit the current account earnings, lower foreign private investment and pre-payment of $1 billion foreign debt is due to expand the capital account deficit.
The country is retiring before time $1 billion expensive external loans during this fiscal year to reduce its foreign debt servicing cost. A break-up of net workers’ remittances shows that overseas Pakistanis in the US and the UAE sent back home $687.4 million combined in July-November 2003.
This amount is less by $269.2 million or 28 percent than $956.6 million they had sent in July-November 2002. If this trend continues, the consequent pressure on the current account of the balance of payments would be too hard to sustain, particularly because trade deficit also seems set to rise.
Similarly, if foreign private investment keeps sliding, containing the capital account deficit would be too difficult, all the more so because no large foreign fund will come in during this fiscal year to fight terrorism. Pakistan hopes to get about $395 million from America during the current US fiscal year including $200 million Economic Support Fund for paying about $500 million US debt.
But it may not get the entire amount during the current fiscal year merely because the US fiscal year would end in September 2004 and Pakistan’s in June 2004.
Besides, delays can also hit this assistance, particularly when there are many ifs and buts attached to it—with reference to Pakistan’s co-operation with the US in its war against terror.
WHAT TO DO? There is still time for the policy makers to take concrete steps to increase overseas workers’ remittances and attract more foreign private investment in the second half of this fiscal year.
If they fail to do that, Pakistan’s balance of payments would be hit—and that may give a reason to the IMF to insist upon the authorities to continue borrowing from it.
The IMF had approved a three-year $1.5 billion poverty reduction and growth facility for Pakistan in December 2001 and it will expire by the end of the next year. Pakistan wants to exit IMF-supported programmes after the completion of PRGF that has helped the country stabilize its economy on the one hand, but according to its critics, throttled economic growth on the other.
Independent economists now want Pakistan to stop borrowing for balance of payments support from the Fund and transform the achieved economic stability into faster growth of the economy.
That is possible only when the country’s balance of payments is managed efficiently with a focus to exploit its potentials fully.
To do that, the country needs to focus primarily on growth of exports, workers’ remittances and foreign private investment—the three key sources of foreign exchange earnings.
Pakistan’s exports in the first five months of this fiscal year rose to $4.834 billion, up 11.5 percent from $4.334 billion in a year-ago period.
During this period, its imports also grew to $5.282 billion, up 11 percent from $4.755 billion in a year-ago period. Thus, the trade deficit stood at $448 million, up 6.4 percent from $421 million a year ago.
Pakistan wants to keep the trade deficit at $900 million during this fiscal year with exports at $11.2 billion and imports at $12.1 billion. Short cotton crop coupled with the planned imposition of anti-dumping duty by the EU on bed linen exports may contain exports’ growth in the months to come.
Smaller-than-expected cotton crop is not only leading to cotton imports thereby increasing the import bill but the resultant increase in its price, upto 50 percent, has pushed up the cost of textile products. That, in turn, is sure to hit textile exports, that make up about two-third of the total exports.
Similarly, the planned import of half a million tonnes of wheat and the increased cost of import from the eurozone due to a dramatic surge in the single European currency would push up the import bill in dollars. That is why, the trade deficit looks set to surpass $900 million.
That is why Pakistan now badly needs to attract higher remittances and foreign investment to avoid any pressure on the external sector of the economy.
Admitted, that the launch of a $500 million worth Eurobonds should make it easier for the government to prepay $1 billion expensive foreign debt. But that will increase the overall foreign exchange liabilities.
