KARACHI, July 7: Pakistan saw a balance of payments deficit of $933 million in eleven months of the last fiscal year, according to data released by the State Bank. That compares with a BoP surplus of $1.063 billion in a year-ago period.
The country’s balance of payments turned negative during July-May 2004-05 primarily because of a big $1.849 billion current account deficit compared with a $1.983 billion surplus during July-May 2003-04. What caused such a high current account deficit was that the trade deficit or the gap between imports and exports that stood at $1.006 billion in July-May 2003-04 more than quadrupled to $4.335 billion in July-May 2004-05.
The overall balance f payments surplus or deficit is an appropriate indicator “to gauge the strength or weakness of a country’s external sector and partial indicators such as trade deficit or Current Account deficit are not that meaningful,” to quote SBP Governor Dr Ishrat Husain. Delivering a lecture on June 21 to the participants of National Management Course of Pakistan Administrative Staff College in Lahore, he had emphasized the need for looking at BoP data to assess the health of the external account—rather than drawing often misleading conclusions from current account and trade account data.
Dr Husain had also presented his estimate of overall balance of payments deficit for fiscal year 2004-05 and at that time he was anticipating a BoP deficit of $484 million for the said period. But as the data for July-May 2004-05 show the overall BoP deficit has reached $933 million leaving no space for the optimism that it would be contained at $433 million for full year. Data on full fiscal year BoP for 2004-05 would be out in August.
The SBP chief had based his estimate of $484 million BoP deficit for the last fiscal year on a current account deficit of $1.409 billion and capital and financial account surplus of $925 million. Again, with current account deficit at $1.849 billion in eleven months of this fiscal year the full year estimate of BoP is likely to remain elusive. This may happen despite the fact that Dr Husain’s estimate of $925 million in full year capital and financial account seems achievable as in eleven months of the last fiscal year the surplus in this account was $962 million.
Central bankers say in all probability, overall balance of payments deficit for the outgoing fiscal year would not be less than a billion dollars, despite a one-time inflow of $260 million from the buyers of Pakistan Telecommunication Company Ltd or PTCL. That inflow would give a real boost to the surplus of capital and financial account.
The UAE-based Etisalat that bought 26 per cent share of state-owned PTCL for $2.6 billion, paid $260 million or 10 per cent of the amount in June and is expected to pay the remaining amount in the first quarter of this fiscal year.
Pakistan’s balance of payments is going to see a sizable deficit in fiscal year 2004-05 for the first time in five years. In preceding four fiscal years it enjoyed a BoP surplus—ranging between a record high of $5.911 billion in fiscal year 2003 to a nominal $422 million in fiscal 2004.
At the root of an estimated $1 billion BoP and current account deficit of $2 billion or more for fiscal year 2005 sits a projected trade deficit of $5 billion (based on the fob prices of imports and exports).
The trade deficit rose much faster in the last fiscal year than in previous few years primarily because Pakistan’s economy grew at an estimated rate of 8.4 per cent against the initial target of 6.4 per cent. That increased the requirement for import items of all sorts particularly petroleum products and machinery etc. Besides, soaring oil prices in international market also took their toll on Pakistan’s BoP.
According to SBP data, foreign exchange reserves held with the State Bank at end-May 2005 stood at $9.699 billion compared with $10.784 billion at end-May 2004.
Independent economists criticize the government policy of selling state-owned assets to disguise the balance of payments deficit. Noted economist Dr Kaiser Bengali terms it a short term policy and warns that the people of Pakistan would face its long term adverse impact on economy in coming years.
“This government’s policy is directed at making economic data look nice,” he said. “But when the state-assets selling spree dies down, people will have to face long term negative consequences. That will happen after a few years,” he warned.
Dr. Bengali, and several other economists also point out that the government is attracting foreign direct investment in the areas where, after some time, corporates would start making huge outward remittances of foreign exchange either to repay their debt or as profits and dividends, putting pressure on Pakistan’s foreign exchange reserves and exchange rates.
During July-May 2004-05, Pakistan attracted $1.034 billion FDI up from $904 million a year earlier.