Pakistan’s current account balance indicates an unusual favourable trend since FY01. However, a major factor that influenced the trend most positively was the workers remittances.
Trade balance improvement for one year notwithstanding, the table shows that current account would have run deficits in all the years since FY2000 had it not been for increased remittance inflows due to developments on the international front to fight terror after 9/11, 2001.
The State Bank of Pakistan’s (SBP) annual report 2001-02 states, “The cash remittances registered a phenomenal growth… … .. during FY02… … … Indeed the turning point was the international crackdown on the Hundi network, and the consequent collapse of the kerb premium that favourably changed the market dynamics of remittance inflows… It seems that the increasing international restrictions on undocumented transactions have reduced Dubai’s role as a hub of the Hundi network, which explains the larger formal sector flows into Pakistan directly from countries of origin.”
It is evident from table that the current account deficit of FY01 converted into a surplus in FY02 which increased further in FY03. Had it not been for the increased remittance inflows and had the remittances maintained their pre-9/11 trend, the current account might have posted deficits or smaller surpluses again in each one of these two years also.
Since FY04, the current account posted less surplus which would have been lesser than FY03’s even if the remittances had maintained their higher FY03 level. During the first nine months of FY05, current account recorded a deficit again.
The fact that the overall reserves increased by amounts considerably less that that in FY02 and FY03 is cause for concern (see the table). If current account (and fiscal) deficits were held, inter alia, responsible in the 1990s for growth in external debt, they need to be heeded again for not just eroding the structure of the external payments but also the foreign exchange reserves position.
It is evident from table that remittances have either been offsetting the decrease in reserves or have contributed to significant increase in reserves during the years reviewed since FY00. The increase in reserves declined significantly during FY04 and FY05, during which years, the current account balance first declined and then turned into a deficit.
Even though remittances declined during the last two years despite SBP’s efforts to consolidate the gains through a merger of the formal and the informal foreign exchange markets and exchange rate management, it was the significant increase in services and trade account deficits this time that, unless arrested, might prove to be a drain on reserves in the years to come.
It must be acknowledged that both the services and trade imbalances had declined between FY96 and FY00 due to which the current account imbalance had declined too.
However, to say that the significant gains posted since FY02 were a continuation of the previous trend would be an exaggeration as such a statement completely ignores the impact of international post-9/11 developments due to which Pakistan gained not just in terms of remittances but also in terms of access to international markets and a more accommodative international debt re-profiling.
The SBP annual report further states, “…the FY02 upturn in the current account is better than the combined improvement in the earlier three years…a significant contribution to the FY02 improvement was from factors that may be absent in future years.” While these ‘factors’ are listed in a table in the report, it would have been appropriate if the sources behind these factors were also articulated there and then.
It was in FY01 that Pakistan’s exports approached the $9 billion mark and surpassed it quickly in the following years. While there definitely were indigenous measures taken to boost exports, the impact of, “…substantial expansion in volume terms resulting from increased textile quota /greater market access in the European Union” (Economic Survey 2002-03) needs to be isolated.
For, despite efforts at home, exports did not cross the $10 billion mark until FY03 by when greater access was provided by the EU but not quite by the USA when the latter was approached for similar access after 9/11.
It would be in the fitness of things if government publications were to give a fuller context of the specific factors they mention that together contributed to favourable outcomes.
Also, there is a need to isolate the impact of internal and external factors that contributed to Pakistan’s export growth. Until this is done, however, sources of export growth, economic and non-economic may, at least, be acknowledged and statements rendered more credible. It hurts more to ignore than to accept in due measure what own and other contributions to current account and overall foreign exchange reserves really have been.
The much talked about Pakistan’s debt sustainability may have emanated also from external developments. After 9/11, Pakistan did receive favourable debt re-profiling terms. The two earlier reschedulings of January 1999 ($3.0 billion debt) and January 2001 ($1.8 billion) were ‘flow’ rescheduling that is temporary and limits rescheduling to debt servicing (principal and interest) falling due within a specified consolidation period (two years for the first one and nine months for the second one) coinciding with a country’s programme with the IMF (Economic Survey 2001-2002).
According to the Economic Survey 2001-2002, the third debt rescheduling negotiated in December 2001 with the Paris Club provided “…’stock’ treatment which takes into account the entire outstanding stock (principal plus accumulated arrears) and re-profiles it to over an extended period of time. Stock treatment is rare as it is restricted by the Paris Club to only Highly Indebted Poor Countries (HIPC). Pakistan has been the fourth non-HIPC country to get stock treatment of its debt beside Egypt, Poland, and Yugoslavia.
While it is obvious why Pakistan may have qualified for this stock treatment in the highly charged December 2001, the gains were immense. Pakistan’s total stock of bilateral debt comprised $8.8 billion of ODA assistance and $3.7 billion of non-ODA assistance, that is, a total of $12.5 billion eligible for rescheduling on September 30, 2001. The ODA debt was rescheduled with a 15 years grace period and repayable in 38 years. The non-ODA debt was rescheduled for repayment over a 23 years period with five years grace period.
Pakistan was allowed by the Paris Club to negotiate reduction in interest rates with bilateral creditors. With a 2.3 per cent ODA interest rate and four per cent non-ODA interest rate, “Pakistan will be saving $1.047 billion during the current fiscal year (2001-02); $2.7 billion during three years (2001-02 to 2003-04); and $8.5 billion during the grace period of ODA debt (2001-02 to 2016-17)” (Economic Survey 2001-2002)).
The government publication accepts, “The Paris Club debt rescheduling has provided substantial debt relief to Pakistan… However, the sustainability of debt will depend upon the performance of Pakistan’s exports of goods and services in years to come.
While Pakistan’s negotiating teams must have put in a lot of sincere effort to land the rescheduling agreement, would it have been at all possible as without the external stimulus provided by 9/11.
An independent sensitivity analysis needs to be conducted to see what the components of the external payments account would look like with a normal and not a special rescheduling that provided a rare opportunity in the form of stock treatment, like the one also given to Egypt et al, and recognized by none other than the finance division at Islamabad. Only then would a calculation of debt ratios be meaningful as these need to be interpreted in the light of all external factors that have, inter alia, made them look good!
The SBP report of 2002-03 concedes that the “dominant contribution” to “record breaking overall BOP surplus” in FY03 came from a) workers’ remittances, b) sharp fall in interest payments due to debt retirement and debt substitution, c) “robust non-structural inflows” including Saudi Oil Facility (SOF), logistic support receipts, and cash grant from US, and d) tremendous growth in export earnings.