NationalVOLUME 15 ISSUE # 04

Mixed trends

The economy is showing both positive and negative trends. According to the latest report by the State Bank of Pakistan, the current account deficit (CAD) shrank by 55 per cent in the first two months of the current fiscal year as compared to the corresponding period last year.

The current account deficit — for the two-month period — went down by $1.56b to $1.29 billion from $2.85b during the same period last year. This was in line with the downward trend witnessed throughout 2018-19, when the deficit stood lower by 31pc to $13.58b, from $19.8b in FY18 — recording a decrease of $6.3b.

This is a boon for the government which has been struggling to reduce the deficit by borrowing from donor agencies, commercial banks as well as friendly countries. The major reason behind the fall in current account deficit is the decline in the trade deficit. According to the trade summary issued by the commerce ministry for the two months under review, exports jumped to $3.738b as compared to $3.650b during the same period last year — showing an increase of 2.41pc or $88 million. Similarly, imports for the period declined to $7.553bn as compared to $9.768b during the same period last year — showing a decline of 22.68pc or $2.215b. In total, the trade deficit for the two months of the current fiscal year stood at $3.815b as compared to $6.118b during the corresponding period last fiscal year.

The reduction in current account deficit is providing great help to the State Bank of Pakistan (SBP) in improving its dollar reserves. The latest figures show that foreign exchange reserves held by the central bank increased by 1.63pc on a weekly basis. Earlier, the reserves had fallen below the $7-billion mark, which raised concern over Pakistan’s ability to meet its financing requirements. However, financial assistance from the United Arab Emirates (UAE), Saudi Arabia and other friendly nations helped stabilize the foreign exchange reserves. As of September 13, the foreign currency reserves held by the SBP were recorded at $8,600.4 million, up $138 million compared with $8,462.3 million in the previous week. Overall, liquid foreign currency reserves, held by the country, including net reserves held by banks other than the SBP, stood at $15,898.1 million.

Overall, liquid foreign currency reserves, held by the country, including net reserves held by banks other than the SBP, stood at $15,898.1 million. Net reserves held by banks amounted to $7,297.7 million. Pakistan received the first loan tranche of $991.4 million from the International Monetary Fund (IMF) on July 9, which helped bolster the reserves. Previously, the reserves had jumped on account of $2.5 billion in inflows from China. Over time, the declining reserves have forced the central bank to let the rupee depreciate massively, sparking concern about the country’s ability to finance a hefty import bill as well as meet debt obligations in coming months.

In April last year, the SBP’s reserves had increased by $593 million due to official inflows. A few months ago, the reserves surged due to official inflows including $622 million from the Asian Development Bank (ADB) and $106 million from the World Bank. The SBP also received $350 million under the Coalition Support Fund (CSF) earlier. In January last year, the SBP made a $500-million loan repayment to the State Administration of Foreign Exchange (SAFE), China.

But while current account deficit has shrunk and forex reserves show a rising trend, on the negative side foreign direct investment (FDI) fell by 58.4 per cent during the first two months of the current fiscal year. The total FDI during the July-August period declined to $156.7 million from $376.9m in the same period last year. Moreover, on a month-on-month basis, the FDI inflows in August declined by a staggering 57.8pc to $83.4m from $197.9m in August 2018.

It should be a matter of concern for the government that despite significant improvements in the energy infrastructure and security conditions, the country has failed to attract investment as expected. One reason is that the completion of the first phase of the China-Pakistan Economic Corridor (CPEC) has brought down the level of FDI inflows into the country. A detailed analysis shows that the UK was the second leading investor in the country with $11.7m, followed by the UAE with $5.9m and Malaysia $5.4m. The oil and gas exploration sector remained the favourite of foreign investors during the July-August period with inflows of $21.3m, followed by $16.4 in transport, $14.9m in electrical machinery and $15.3m in textile in the textile sector.

At the same time, Foreign Portfolio Investment (FPI) rose by an encouraging 182.8pc to $107.3m against an outflow of $129.6m during the same period last year.

Economic experts are of the opinion that the declining FDI figures call for new efforts by the government which should offer a more attractive package of incentives to foreign investors. This is especially important in view of the fact that exports have failed to pick up despite a steep depreciation of the rupee.