Once-too-high imports are now tumbling. Once-battered exports are crawling up. The change is visible. The trade deficit is down. Remittances are doing better. Hopes for a huge foreign investment are about to start materialising: follow-up events of Saudi Crown Prince Mohammad bin Salman’s visit to Islamabad will show how.

Things are cool on the external front. Or so are we being told again and again.

But can the growth rate of exports make a real impact on the external account? Or are volumetric gains even at twice that rate enough to contain the trade deficit? Is the current rate of decline in imports sustainable and, if so, how? What about the concentration of home remittances in a few host countries of the Pakistani diaspora? What happens when economic conditions of the host countries change for worse? Is it OK to continue counting on remittances even if it means a brain drain from the homeland? What’s the social cost of overreliance on remittances? Can Pakistan afford to continue relying on remittances more than exports? These are some valid questions that need to be probed from a long-term perspective.

The rupee devaluation produced inflation, and tighter interest rates continue to make the industrial output costlier

Hopefully, the PTI government rejoicing at a small gain in exports and continuation of big gains in home remittances will soon evaluate their true significance and do more to boost exports and sustain the rising remittances’ trend.

In seven months of this fiscal year, exports grew to $13.23 billion from $12.94bn — a gain of $290 million or 2.24 per cent — and that, too, with the help of a straight 14pc rupee depreciation during this period. Our Ministry of Commerce issued a press release to celebrate this achievement. That’s OK, but perhaps the ministry would do better to find out why exports fetched only $290m more on an annual basis despite such a big fall in the rupee’s value.

Our imports tumbled to $32.5bn in July-Jan from $34.26bn a year ago, creating foreign exchange savings of $1.77bn in seven months. Mainly because of this substantial fall in imports rather than growth in export earnings, the merchandise trade deficit fell to $19.26bn from $21.32bn in the year-ago period. This $2.06bn decline in the trade deficit is important, but it came at the cost of 14pc rupee devaluation, tighter interest rates and upward revisions in import duties of hundreds of items.

The rupee devaluation produced inflation and tighter interest rates continue to make the industrial output costlier. So this hard-earned contraction in the trade deficit ought to be sustained.

Now the government has once again started rationalising the import tariff to keep the cost of industrial raw materials low. Finance ministry officials claim that the exercise will facilitate exports while keeping the check on imports of luxury consumer items intact. Only future movements in merchandise trade will expose or confirm their claims.

An intriguing aspect of our external economy is that foreign exchange dispatches from overseas Pakistanis are growing fast, narrowing the gap between home remittances and exports. Against total exports of $13.23bn in July-Jan, remittances during this period totalled $12.77bn with an annualised growth rate of 12.2pc compared with exports growth of just 2.24pc. If both sources of foreign exchange earnings continue to grow at the same rate in coming months, remittances and exports will be on a par at the end of this fiscal year. Such a situation will throw up lots of questions for politicians to answer — and lots of challenges for economic policymakers to handle.

From the policymaking angle, it is time to remove structural flaws in exports as opposed to eliminating exchange rate and tariff limitations. Constant supply of affordable energy, ease of doing business, minimum political uncertainty, speedy reforms in the agriculture and services sector and elimination of red tape from decision-making processes and platforms are some of the things our export sector keeps craving for.

For sustaining a double-digit increase in remittances, the most important things is to ensure supply of semi-skilled, skilled and professional workforce to global markets — and that, too, without creating a human resource gap in the domestic economy. That’s not an easy task. Gains in remittances due to better economic conditions in host countries like the United States or United Kingdom — or as a result of deeper penetration of unskilled and semi-skilled workforce in Gulf nations and Malaysia — are prone to sudden changes.

So far this fiscal year, Pakistan has received $7bn foreign exchange support from China, Saudi Arabia and the United Arab Emirates to augment its foreign exchange reserves. Despite that, the central bank’s reserves currently stand around $8.2bn, equal to less than two months of imports. These foreign funds have been placed with the central bank and, as such, do not constitute the government’s external debt. But by whatever name you call them, they are the foreign exchange liabilities of the state and also carry a financial price in addition to their huge socio-political costs.

Further placements are in the pipeline and the picture may become clearer after the Saudi crown prince wraps up his visit to Pakistan. How exactly the nation will pay the price of the accumulation of more and more foreign exchange liabilities will continue to unfold in coming years.

And how our external sector will be affected by the servicing of these foreign exchange liabilities in addition to regular external debt servicing is a question that is sure to remain a source of worry for people in power. Already, Pakistan spends roughly $1.5bn on external debt servicing on a quarterly basis. That amount itself is going to grow rapidly when the country begins external debt servicing related to the funds received under the CPEC. So rejoicing at an uptick in exports or double-digit growth in remittances can prove short-lived and external-sector weaknesses may continue to haunt us for quite some time. Much depends on how quickly we start receiving the promised thick flows of foreign investment from Saudi Arabia and the United Arab Emirates. In the first half of this fiscal year, foreign direct investment totalled just $1.32bn.

Will this amount double or triple by the end of the year? And, by the way, how will that affect the volumes of the repatriation of profits and dividends on foreign investment? In the first half of 2018-19, $1.2bn flew out of Pakistan under this head — of which $1bn was on account of profits and dividends on foreign direct investment alone.

Published in Dawn, The Business and Finance Weekly, February 18th, 2019