PML-N government completed its five-year term on 31st May 2018. During its entire regime Nawaz Sharif has been boosting about putting economy of the country on fast moving trajectory. His key mantras were overcoming energy crisis, boosting GDP growth rate and initiating infrastructure projects and completing these on faster pace. However, PML-N completely overlooked fast deteriorating balance of payment situation, avoided approaching International Monetary Fund (IMF), the lender of last resort. The point of real concern is that PML-N didn’t approach IMF, but borrowed US$9.6 billion from other external sources during 10MFY18, of which US$1.6 billion were acquired during the month of April alone. It raises a question about the ownership of country’s foreign exchange reserves.
For the week ended 25th May 2018, foreign exchange reserves of Pakistan were reported at US$16,406.8 million. Out of these the reserves held by State Bank of Pakistan (SBP) amounted US$10,033.8 million, whereas the net reserves held by the commercial banks were reported at US$6,373 million. The reserves held by the central bank decreased by US$286 million due to external debt and other official payments. Will it be right to infer that whatever reserves the central bank has are not owned by Pakistan but borrowed? If the inference is right, can this also be said that Pakistan virtually defaulted? If it is such a case why the IMF is keeping silent? According to some experts PMN-L just wanted to take pride that its government lived without the crutched of IMF and hiding the most precarious situation which the interim and subsequent governments will have to face.
In the absence of relevant details for the month of May 2018, I have no option but to refer back to the official data released at the end of April 2018. Reportedly, the current account deficit (CAD) for April 2018 surged significantly to a record level of US$1.96 billion as compared to US$1.2 billion a month ago. Despite contained trade deficit, (marginally up 0.6%MoM) the CAD widened on account of jump in outflows, up nearly 47%MoM. This was due to a decline in current transfers by US$329 million and a fall in remittances by almost 7%MoM. Consequently, current account for 10MFY18 touched US$14.0 billion as compared to US$9.4 billion for the corresponding period of last year, up 50.0%YoY.
The persistent hike in CAD has been primarily on the back of growing trade deficit recorded at US$25 billion, as imports grew by more than 17%YoY as against growth in exports by 13.3%YoY, while remittances have shown marginal recovery ,up by 3.8%YoY. Going forward, as trade deficit continues to widen, CAD is expected to grow and touch US$16 billion (nearly 5% of GDP) by the end of current financial year. Any seasonal jump in remittance inflows during Ramadan could provide some relief.
Historically, remittances have remained the biggest balancing factor but over the last few years the growth in inward flows has remained constrained. The inflows during April 2018 amounted to US$1.7 billion (down 6.89%MoM) as compared to US$1.8 billion in March 2018, though significantly higher as compared to US$1.5 billion for April 2017. Cumulatively, remittance inflows have shown a recovery to record US$16.3 billion during 10MFY18, reflecting a growth of 3.92%YoY as against a decline by 2.5%YoY to US$15.7 billion during 10MFY17. It is worth noting that the decline from GCC states (labor market challenges) was offset by inflows from UK and the US, recorded at US$4.5 billion. The share of GCC states during 10MFY18 declined to 59% from 63% during 10MFY17.
Overcoming CAD deficit
Facing an adverse balance of payment should not be a surprise even for a person of average wit, especially when the options to overcome the crisis are also known. The PML-N government made the biggest blunder of not approaching the lender of last resort, IMF. It kept on borrowing from other sources at higher interest rate. The government also failed miserably on both the fronts, boosting exports and containing imports. Pakistan would have faces even more precarious had prices of crude oil were not low, though these have increased over the last few months. PML-N government also failed in convincing Saudi Arabia to facilitate Pakistan though supplying oil at concessional rate or deferred payment.
Export of textiles and clothing contributes nearly 65% to total export of the country, but its performance has remained far from satisfactory. According to the data released by the government exports continue to post double digit growth, with April 2018 exports amounting to US$2.13 billion, up 18.6%YoY. This increased can be attributed to the recent depreciation of Pak rupee, down by 9.5% since December 2017. Both food and textile exports were up 37.6%YoY and 12.1%YoY, respectively. In textile group, higher value added as well as low value added exports grew to reach US$822 million and US$327 million respectively. On a cumulative basis, 10MFY18 textile exports grew by 8%YoY to US$11.14 billion as compared to US$10.31 billion for 10MFY17, (higher value added exports up by 9.6%YoY to US$8.12 billion. Low value added exports which remained largely sanguine in the first half strongly recovered in the second half to US$3.025 billion (up 4.1%YoY). Looking ahead, some analysts expect textile exports to maintain their upward trend as the sector would continue to benefit from strengthening economic activity in key export markets, flexible exchange rate regime and continued government support (likely extension of export incentives and tariff subsidy). However, prolonged delay in payment of exporters’ refunds could undermine utility of export package posing downside risk to export outlook.
In the latest Monetary Policy Announcement, the policy rate has been increased by 50bps to 6.5%, which raised discount rate to 7%. The central bank justified the hike on two grounds: 1) CAD rising to US$14 billion and 2) absence of foreign flows. One completely fails to understand how the hike in interest rate can help Pakistan in containing CAD, as the country suffers from cost pushed inflation that erodes competitiveness of the exporters?