Pakistan’s external sector is in a very happy position. It fact, it has never been so good. The most significant thing about the situation, which should be remembered, is that it is basically external driven and not domestic driven. Therein lies its inherent weakness. An attempt is made to evaluate the performance during the calendar year 03 and see how sustainable it is in the longer run.
The post 9\11 developments have been God-send, so far as their economic implications for Pakistan are concerned. Whether they prove a one-shot operation or they set a new long-term pattern is of vital importance.
For its crucial role in the US anti- terrorist campaign in Afghanistan, Pakistan has been officially rewarded in many ways. Apart from lifting of sanctions imposed following the nuclear explosion in May 1998, it was given some debt write- off, reimbursement for logistic support to US forces engaged in Afghanistan, special market access, though selective and limited in scope, by US and EU, locked doors of international finance opened, international financial institutions (IFIs) became anxious to lend and external debt was rescheduled by the Paris Club. It is agreed that panic griped foreigners in the US in general and Pakistanis in particular. The state of uncertainty continues. This, coupled with anti-money laundering measures, induced a sudden spurt in Workers’ Remittances, especially from US and some European countries and this has been a major factor in improvement in the external balance. A good part of the increase in the remittances has been by way of reverse flight of capital. How long the initial reaction to the totally unexpected new environment would take to wear off and at what level the remittances may be expected to stabilize? The trend during 03 may give some clue.
There is no doubt about the shift in the trend after June 03. As a result, the remittances during July-November 03 were $ 1.4 billion as against $1.8 billion in the same period last year, or a reduction of 22.3 percent. Remittances from USA have come down from $ 552 million to $ 481 million, or by 12.9 percent and those from Non-Gulf countries by $ 127 million to $ 769 million, or by 14.2 percent. Those from Gulf countries fell by $ 189 million to $ 683 million or by 21.7 percent.
Interest payment (net) on account of official debt had seen a relief of $ 146 million reducing the burden to $ 855 million in FY 03. It amounted to $ 213 million during July-October 03 as against $ 315 million in the corresponding period last year. A related element of balance of payments, which is not receiving due attention, even though it needs to be watched very carefully, is the remittance of profit and dividend earned by foreign investment in the country. This had increased from $ 851 million in FY02 to $ 1.1 billion in FY 03. During July-October 03, it was $ 364 million as compared with $ 378 million in the same period last year.
Another important development after June 02 has been a phenomenal increase in payments on account of travel. During July-October 03, there was an outflow of $ 244 million as compared with only $ 18 million in the corresponding period last year and $ 145 million for the whole FY 03. It is not clear how far it was the pent up desire to travel in the post 9\11 era and how much of it is the shift in demand for foreign exchange for this purpose from the free market to the official channels due to liberalization of the rules.
All this has reduced the current account surplus, in spite of better export performance. The surplus was lower at $1.4 billion during July-October 03 from $ 1.6 billion in the same period last year. There was a rare surplus in trade balance of $ 52 million, in contrast to a deficit of $ 172 million last year. The deficit in services (net) widened to $ 666 million as compared with that of $465 million last year. Current transfers (net) were lower at $ 2.04 billion from $ 2.23 billion last year.
Rescheduling of external debt by the Paris Club has helped in foreign debt servicing, particularly in repayment of principal. The stock of debt owed to the Club declined from $13.2 billion at the end of 02 to $ 12.6 billion in March 03, but subsequently increased to $ 12.9 billion in September 03. Over the year, it shows an increase of $ 222 million and $ 259 million since June 03. With more borrowing, the liability on account of multilateral medium and long-term debt has gone up by $ 222million to $15.04 billion between end 02 and September 03 and by $ 335 million over the year. Private Non-Guaranteed debt continued to decline and was down to $ 1.9 billion from $ 2.1 billion as of end 02 and $ 2.2 billion a year earlier. Total external debt in September 03 stood at $ 33.4 billion as against $ 33.9 billion at end 02 and $ 33.8 billion in September 02. Actual disbursements on account of foreign long-term loans\credit (net) during July-October 03 were $ 374 million as against $ 641 million in the same period last year.
Government is making every possible effort to attract foreign investment in the country. For this it has laid down the most liberal rules as to the extent of foreign investment, remittance of profit and repatriation of capital. Even so, the response is lukewarm, to say the least, if investment due to privatization of state enterprises is excluded. Total foreign investment increased from $ 475 million in FY 02 to $ 820 million in FY 03. During July-November 03 this was only $ 204 million as against $ 477 million in the same period last year, or less than half.
Foreign investment consists of direct investment and portfolio investment. The former, besides capital, brings in latest technology and management and is very beneficial, if it goes into the real sector. It has played a major role in the development of many countries. This is why it is most sought after. It is naive to expect foreign investors to stake their capital when they see local investors sitting on the sideline with folded arms.
Direct Investment (net) saw a quantum jump during FY 03 when it increased to $ 798 million from $485 million in the preceding year. The bulk of increase was due to investment in financial business, which shot up from mere $3.5 million in FY 02 to $ 207.5 million accounting for 65 percent of the increase. This was due to the privatization of UBL, which alone brought in $200 million. The other substantial increase was in chemicals, which improved from $10.6 million to $86.2 million. It is very significant that the investment in oil and gas exploration declined from $268.2 million to $186,6 million. During July-November 03, direct investment was only $ 217 million or less than half of $465 million in the same period last year.
Portfolio investment means transfer of ownership from local to foreign investor, without any change in management. It is much easier and less time consuming than direct investment to materialize as well as to liquidate. In a liberalized system, this investment can easily and quickly move out, as it can come in. It has a mercurial temperament. Its cross-border movements would have repercussions not only for the external account, but also for the stock exchange to the extent it is invested there. This has already been experienced in Pakistan, though not on the same scale as in some other developing countries in South East Asia. On this account, there was a net inflow of $ 22.1 million during FY 03.
In July-November 03, this became negative, indicating out flow, by $12.5 million in sharp contrast to the positive figure of $12.3 million in the same period last year. It appears that foreign investors in the stock market have moved out after making a kill in a booming market, in anticipation of bust. The bullish fervor in the stock market is so strong that a loss of investable funds of this magnitude has not been noticed.
The moral of the experience is that Pakistan’s balance of payment position has now become quite complex. Gone are the days when an analysis of current account was enough. Now capital account needs as much attention as the current account. The other lesson is that, as Workers’ Remittances are levelling off and foreign investment is lack luster, improvement in balance of payments must come from trade balance emerging from exports.
Balance of payment data, as mentioned above, indicates a small surplus after June 03, but the trade figures reveal the normal pattern of trade deficit. The two sets of figures vary because of difference in the coverage and timing. During July-November 03, the trade deficit widened by $ 43 million to $ 449 million, as imports rose faster than exports.
Exports, which were almost stagnant for quite some time and unable to cross the $9 billion per annum, have also become active. In FY 03, exports improved by 22.2 percent to reach $ 11.16 billion.
They have benefited from the special market access given by USA and EU after 9\11. Exports to US increased by 10.1 percent in FY 03 as against 6.1 percent in the preceding year. Over FY 01, they were better by 16.8 percent. Exports to Europe rose by 19.7 percent in FY 03 as compared with 8.3 percent in the preceding year. Over FY 01, they show an improvement of 29.7 percent.
Textiles have been the star performer showing an improvement of $1.45 billion to account for 71.5 percent of the total increase and claiming 66 percent of total exports during FY 03. Other commodities to record a substantial increases were: unclassified Others (+ Rs 207 million), Other Manufactures (+ Rs. 176 million), Rice (+Rs. 107 million), Wheat (+Rs. 59 million), Raw Cotton (+ Rs.24 million). During July-November 03, they recorded an increase of 8.8 percent over the corresponding period last year and were $ 4.73 billion.
Pakistan’s export structure is extremely narrow based, concentrated in textiles relying heavily on quotas, which will be soon dismantled creating a situation of free for all cut throat competition.
The international environment is changing very rapidly with the implementation of WTO with effect from January 1, 2005, only a year from now, exports will be a new ball game in which only the fittest would survive. Pakistan’s principal export textiles, currently governed by quotas, will be faced with a difficult situation. Unfortunately Pakistan woke up very late and still is not prepared to cope with the new opportunities and challenges. To avail of the opportunities not only price and quality of products should be of world standard, but they will have to be marketed according to the new rules of the game. New non-tariff barriers in the name of environment, health standards and social compliance are going to be put up. This will demand a radical change in the corporate culture hitherto nurtured in a sheltered market with lot of props. Pakistani exporters will have to get out of their traditional mould, especially give up the very strong habit of looking more to duty draw-backs and concessional credit than actual exports.
There has been an important twist in globalization after the collapse of WTO ministerial meeting at Cancun. So far developed countries were able to steam roll developing countries. But once in a rare unity, developing countries put up a united front and refused to go along demanding credible action in regard to agricultural subsides in developed countries.
After the meeting, there is a talk of bilateral agreements for free trade. This is the old “divide and rule effort” in which small and weak developing countries would not be in a position to bargain with powerful developed countries and are thus likely to lose individually what they could hope to gain collectively. Even otherwise, there are important moves for free trade areas and economic unions. Pakistan has been engaged in bilateral discussions with a number of countries for free trade or preferential treatment but nothing concrete has been achieved so far. The SARCC is the major forum but this has been hamstrung by the Kashmir dispute between India and Pakistan. That obstacle notwithstanding, the two countries have been inching towards preferential trade. Recently, they have enlarged the scope of preferential duties on imports. A preferential trade agreement, SAFTA, is expected to be signed at the forthcoming SARCC Summit in January 04. The key question is: Is Pakistan ready to face India on the home ground?