On June 22, the rupee closed at 60.69 a US dollar, down from 60.61 on June 15, losing eight paisa within a week as the pace of foreign exchange inflows slowed down during the week under review.

In eleven months to May the rupee lost 0.9 per cent to a US unit. Bankers said the rupee could have lost more value had the State Bank not intervened frequently to keep exchange rates stable.

The external sector showed mixed performance in 11 months of this fiscal year. Home remittances and foreign direct investment swelled but inflow of privatisation proceeds has dried up. Exports grew only 3.6pc but imports expanded 8.4pc. This enlarged the trade and current account deficits.

The increase in the remittances from a little over $4 billion in July-May FY06 to $5bn in July-May FY07 is just in line with the trend in the region. Bangladesh has also generated much larger remittances this year than in the last year. And in 10 months to April it outperformed Pakistan. During July-April FY07, BD’ s home remittances totalled $4.90bn, far higher than Pakistan’s $4.45bn.

In eleven months of this fiscal year, foreign direct investment rose two and-a-half times over the same period of last year. More importantly the FDI was not concentrated in one or two sectors: it was spread across a variety of industries including tobacco and cigarettes, beverages, petroleum refining, oil and gas exploration, transport, construction and financial business.

However, it is difficult to assume that Pakistan would attract equally large inflows of FDI in the next fiscal year amidst pre-poll political heat and post-poll politico-economic challenges.

In fact, pre-polls sharpening of political divide and bureaucratic lethargy have already decelerated the privatisation process. In eleven months to May, Pakistan received only $133 million as installment of the sell-off of 26pc shares of PTCL in July 2005. Between July-May FY07, the government did sell state-owned shares in a few industrial units including Pak American Fertilizer—but to local buyers, thus earning no fresh foreign exchange.

The privatization of Pakistan Steel in “indecent haste” and its subsequent nullification from the Supreme Court last year still haunt international investors. Similarly the privatisation of KESC has also raised many questions as instead of improving power supply, the new management made millions suffer the worst-ever power crisis in the country’s history.

The most important question is why the new KESC management has not invested the promised amount of Rs4bn in additional power generation. The opposition and the MQM, an important ally of the ruling coalition government, are calling for termination of the agreement with the buyers of KESC and subsequent re-nationalisation of the power utility.

How all this would reflect on Pakistan’s privatization programme in the next year is anybody’s guess.

In eleven months to May, the trade deficit grew 15pc to over $12bn. This had an impact on the current account deficit as well, which expanded 60pc to more than $7bn. However, a huge inflow of FDI and portfolio investment both in the equity and debt markets offset the current account deficit and the balance of payments posted a surplus of $993m.

Had Pakistan not raised eurobonds, its BOP surplus would have turned into deficit. Such debts raised foreign exchange reserves to a historic high of $15bn on June 9. The reserves maintained this level on June 16 as well.

Strong inflows of foreign exchange increased the level of net foreign assets and consequently of money supply. Between July 1, 2006-June 9, 2007, the M2 grew 16pc, leaving the full fiscal year target of 13.5pc far behind. Small wonder than that CPI inflation showed an average increase of 7.8pc in eleven months of the fiscal year.

In addition to faster monetary growth, higher food prices also stoked inflation. Besides, SBP’s efforts to contain currency in circulation did not succeed well.

Upto June 9 this fiscal year, currency in circulation expanded at the rate of 18.3pc, against 15.7pc in the year-ago period.

Between July 1, 2006- June 9, 2007, the private sector’s borrowings from banks totalled Rs279bn against the full fiscal year target of Rs390bn. On the other hand, the government’s borrowings from banks totalled Rs173bn against the full year target of Rs120bn.

Whereas the overall government borrowing exceeded the full year target on June 9, the government managed to retire debts obtained from the central bank through its borrowings from commercial banks. As on June 9, the government had retired Rs23bn worth of State Bank loans, that are regarded most inflationary.

The private sector borrowed less from banks because of higher interest rates and also because it’s extra borrowings from banks in the last few years had raised its liquidity levels too high. Also, banks lowered their lending to the private sector on the back of strong demand from the government.

The decline in the private sector credit off-take can also be attributed to a slower than targeted growth in the large-scale manufacturing.

In ten months to April, LSM grew 8.75pc against last year’s 10.68pc, which suggests that the full year growth rate would surely be less than the targeted 13pc.

As the overall private sector loaning remained sluggish in this fiscal year, agricultural lending also advanced at a slower-than expected pace. In eleven months of the year, banks lent about Rs142bn to the agriculture sector against the full year target of Rs160bn. Bankers involved in farm loaning say banks might miss the target at the year-end.

However, compared to the last year, though the private sector credit growth was slower, agricultural loaning was rather faster (See Table).

Zarai Taraqiati (Agricultural Development) Bank that has the largest outreach to farmers particularly improved its agricultural lending. (In eleven months to May it lent Rs47bn against the full year target of Rs48bn, which suggests that its full year lending would easily cross Rs50bn mark).

A higher than last year’s agricultural lending contributed its bit to an estimated fivepc growth in agriculture this fiscal year, three times the growth of 1.6pc last year. — Mohiuddin Aazim