The federal budget aims at achieving 4.8 per cent GDP growth in the next fiscal year. This cannot happen without allowing imports to grow faster. The government has already decided to cut additional customs duty and regulatory duty on 3,000 types of import items, including industrial raw materials and intermediate goods. This means the average monthly merchandise import bill that stood below $4.6 billion in 2020-21 will likely shoot up to $5bn or even higher in 2021-22 if we also factor in the possible increase in the imports of finished consumer goods on the back of higher economic growth.

Next year, we need $60bn to finance imports. But the target set for next year’s merchandise exports is $26.8bn. Where will we get enough foreign exchange to fix the trade deficit of $33.2bn?

The obvious answer is: home remittances. Policymakers hope that this year’s total estimated remittances of $29.3bn will rise further to $31.3bn next year. But if imports are to reach $60bn, even exports and remittances together cannot match that level. For the government, it’s not a problem. It says the trade deficit will be lower as the import bill will be $55bn.

Now there lies the problem. Year after year, Pakistan has missed macroeconomic targets by wide margins. But when it comes to making initial estimates at the start of a new fiscal year, it always forgets this fact.

The external debt financing requirement for 2021-22 will be higher than it was in the current fiscal year

Merchandise imports in the first 11 months of 2020-21 have crossed the $50bn mark and are on their way to reach $55bn for the full fiscal year ending in June. But our policymakers still believe they can keep the import bill at the same level next year, and that too amidst higher economic growth and after reducing import duties.

This overoptimistic thinking has also convinced them that increased foreign exchange earnings through exports and remittances will help in keeping the current account deficit at $2.5bn.

Finance Minister Shaukat Tarin thinks containing the current account deficit somewhere between $2.5bn and $3bn should not be a problem. He thinks that a $26.8bn export target is “conservative” and the actual export revenue may hit the $30bn mark. Talking to a private TV channel after presenting the budget, he said the rising trend in remittances seen in 2020-21 could be well sustained next year.

Here is a question: can Pakistan actually meet the $31.3bn remittances target next year even if it witnesses thicker foreign exchange outflows on account of foreign travels and even amidst declining exports of workforce? Foreign travels and tourism may accelerate next year as globally Covid-19 is showing signs of weakening and travel restrictions are being eased.

Meanwhile, the number of Pakistanis going abroad for work has declined in the past 16 months, according to the Bureau of Emigration and Overseas Employment. In 2020, the number plunged to 224,705, obviously due to the Covid-19-induced global recession, from 625,203 in 2019. In the first four months of 2021, only 107,418 Pakistanis left for overseas jobs.

This lower export of workforce is likely to start affecting remittances’ growth in the near future. Besides, the dramatic rise seen in remittances in 2020-21 was primarily due to a strong rebound in the economies of host countries, like the United States and the United Kingdom, and the repatriation of savings of our diaspora in Saudi Arabia and the United Arab Emirates where hundreds of thousands of them lost jobs.

Thus, the situation in the next fiscal year might not be as favourable for remittances’ growth as it was this year. But the government is pinning all hopes on Roshan Digital Accounts. Overseas Pakistanis can open and feed these accounts in Pakistani banks while sitting abroad and use the funds deposited therein for investment in debt, equity and real estate markets of their homeland.

The government believes these accounts that have already attracted over $1bn so far will not let the growth momentum of remittances (up 29pc in 2020-21) subside. That makes sense. But then the government must also realise that the foreign exchange landing in these accounts and then invested in Pakistan (instead of going in the hands of the resident beneficiaries) is but foreign investment. Expecting a rise in foreign investment — partly due to a special conduit opened for overseas Pakistanis — is one thing and expecting the diaspora’s pure remittances to grow continuously is another. From the viewpoint of the overall balance-of-payments management, the investment portion of remittances (being a part of the financial account of the balance of payments) cannot play any role in containing the current account deficit.

And even if the current account deficit is contained at $2.5bn — or somewhere between $2.5bn and $3bn — Pakistan will still have to struggle in external account management. The reason is that the overall balance of payments remained negative by $3.56bn in the first 10 months of this fiscal year. The budget does not propose any measures to attract large sums of foreign investment next year.

The external debt financing requirement, meanwhile, will be higher next year than it was in the current fiscal year. That is why the budget for 2021-22 has earmarked Rs302.5bn (or less than $2bn) for this purpose — higher than the estimated Rs239.6bn for 2020-21. But this projection is based on anticipated external financing of $17.5bn that includes loans from the IMF, World Bank and Islamic Development Bank as well as commercial banks’ foreign loans, eurobond proceeds and international grants.

Though the deferred oil payment facility from Saudi Arabia has not been included in the projected external financing shown in the budget document, the government hopes to regain this facility next year. The finance minister confirmed this to a private TV channel, but refused to talk about the specifics. To some extent then the health of our external sector may remain dependent on geopolitics in the next fiscal year.

Published in Dawn, The Business and Finance Weekly, June 14th, 2021

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