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Is balance of payment crisis easing?

Published on 17th Mar, Edition 11, 2014

 

After the extension of US$1.5 billion loan by Saudi Arabia, Pakistan’s balance of payment crisis seems to have eased, at least for the time being. However, concerted efforts have to be made to boost exports to reduce heavy dependence of remittances. There is also need to create conducive environment for the inflow of direct investment.

While there are expectations that after the grant of GSP Plus status to Pakistan by the European Union, exports are likely to improve. However, the prospects look grim because of no easing in energy crisis. With the rise in mercury level in summer, the spells of electricity outages are likely to further increase and adversely affect the output of manufacturing sectors, particularly textiles and clothing industry contributing the largest share in total exports.

It is necessary to reiterate that bulk of foreign exchange reserves of State Bank of Pakistan comprises of borrowed amount, which have to be returned sooner or later. It is also feared that remittances can prove paltry keeping in view repayments to be made to International Monetary Fund (IMF). While boosting exports remains the only plausible solution, achieving the target may not be possible in the absence of achieving higher exportable surplus.

Over the last few days exchange rate has come down significantly, which looks a good omen but exporters of textiles and clothing have also come under pressure. It is on record that with strengthening of Pak rupee they indulged in panic selling of dollar. They have also expressed their unease saying that a stronger rupee does not bode well for boosting exports. However, those expressing apprehensions on the improving strength of rupee completely are completely ignoring the fact that reduction in volatility of exchange rate will also help in bringing down inflation rate in the country as well as cutting down discount rate.

The recent panic selling of US dollar by exporters also hints towards that exporter held huge quantum of processed outside hoping further depreciation in Pak rupee value. However, a reversal in situation forced them to indulge in panic selling. Reportedly exporters queued to sell dollars in millions fearing further plunge in the value of greenback both in the open and inter-bank markets. Exporters used to keep their proceeds for more than the allowed 130 days in a hope to sell their holdings at a better rate, but over the last few days their expectations were marred.

Some of the quarters are trying to spread disinformation that the sudden fall in US dollar value has dealt a serious blow to the banks as their holdings of billions of dollars were devalued, banks hold $4.8 billion in their reserves. This is incorrect to a large extend because bulk of the foreign exchange belongs to account holders and not to the banks. However, another point needs serious attention of the policy planners as well as the strategists. Bankers and analysts say that this downward trend is short-lived because Pak rupee appreciated due to panic selling by exporters rather than inflow of $1.5 billion from Saudi Arabia. They also fear the situation remains far from satisfactory because bulk of reserves held by SBP are borrowed rather than hard-earned.

Overseas Pakistani workers remitted $10,245.53 million during the first eight months of the current fiscal year 2013‐14, showing a growth of 10.95 percent when compared with $9,234.77 million received during the same period of last fiscal year.

A positive point is that Pakistan’s trade deficit narrowed down by over 4 percent in the first eight months of this fiscal year from a year ago owing to double digit growth in exports and a paltry growth in imports. In absolute terms, the trade deficit fell to $12.542 billion during this period from $13.187 billion as compared to the period last year. The Ministry of Commerce has estimated that exports will pick up in the months ahead because of duty exemptions on goods following granting of GSP Plus status to Pakistan. But growth in exports will depend on improvement in energy supply to the textile industry which is concentrated in Punjab.

According to a new report there are growing fears that Pakistan lose $150 million export to the US market due to a sluggish commerce and textiles ministries and poor trade diplomacy. Negligence and late responses by the textile and commerce ministries to allay the concerns of the US-based Walt Disney Company will deprive 16 Pakistani companies from exporting their products to that particular company from April 1, 2014. In August 2013, Walt Disney Company had intimated authorities in Pakistan that it would stop placing orders with Pakistani exporters from April 1, 2014 as these Pakistani textile companies were failing to meet international health and safety standards. The US Company wanted Pakistani exporters to join the Better Work Program (BWP) if they wanted to keep on receiving the orders.

Pakistan’s total export to the US is around $3.6 billion, out of this $3.2 billion comprises of textiles and clothing. However, Pakistan has failed in improving its position in the worldwide governance index (WGI). As reported in media, Pakistan scored just 19 points in the WGI, six points below the baseline to avoid cancellation of orders. However, textile ministry officials are of the view that Pakistan has been subjected to sheer injustice during the point awarding process. This impression is there because Pakistan has been given just 0.5 points in the head of political stability despite the fact that the recent smooth transition of power is simply the result of political stability.

Reportedly overseas buyers have also expressed concern over fire in a garment factory in Karachi in which hundreds of men and women were reduced to ash. It is feared that the US and European companies may cancel their orders due to the poor implementation of labour laws in the country. The market access granted to Pakistan under GSP Plus would also be adversely affected. Pakistan hopes to increase its exports by $1.2 billion to 27 European Union countries in the calendar year 2014 under GSP plus.

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