High growth and large deficits
THE fiscal year 2007 has ended with, as was feared, a current account deficit of over seven billion dollars. It is over two billion dollars or 41 per cent more than the current account deficit of the preceding year which was 4.90 billion dollars.
What is worse is that the current fiscal year threatens to be worse according to many indicators, and may end up with a deficit of over 9 billion dollars destabilising the entire financial structure.
International aid agencies have warned Pakistan against accumulating such huge deficit which is neither sustainable nor helpful for maintaining the economic growth. But the government appears to be helpless as it does not want to revise or reconsider its policies as these are part of a larger structure.
There are four major causes for the expanding current account deficit, while the foreign exchange reserves have now reached $15 billion. But this amount is almost equal to this years trade deficit of $12.8 billion and this is indeed a critical issue which dwarfs the foreign exchange reserves amount which itself is some achievement.
But of the four major causes for the large deficit, the government can barely exercise influence over one-year exports. Oil prices are soaring and reports from Saudi Arabia talk of the impending 90 dollars a barrel oil price before it moves to fulfil the prophecy of 100 dollars a barrel. Foreign loans have to be serviced and the repayable part to be repaid. Remittances of the profits of foreign investment have to be made promptly. And payment on the services account has to be made in full to keep the wheels of the economy moving.
Imports projected at $32 billion can be reduced but that could mean curtailing the industrial activity, reducing employment and emasculating the official revenues beginning with import duties, sales tax and withholding tax and all that can slow down economic growth. So the government is averse to a cut in imports although a number of them are dispensable items.
Now the government will have to concentrate on increasing exports far above the target of $19.2 billion dollars although last years target was missed by 10 per cent. And the focus has to be more on the value added exports instead of physical bulk.
Prime Minister Shaukat Aziz, reportedly wanted a 20 per cent increase in exports but the commerce minister Humayun Akhtar khan was content with 18.7 per cent increase. Ultimately a target of 19.2 billion dollars was agreed and that means a 6.78 per cent rise over the last years figure.
Three major inflows which eventually determine the pattern of balance of payments can be subjected to changes and are not under the control of the government. They are the foreign direct investment, portfolio investment and home remittances. The FDI which hit the peak of $6.95 billion last year is subjected to political and economic changes in Pakistan. The foreign investment can increase substantially even over $ 6.95 billion if some of the large public sector projects could be privatised this year. But there is opposition to privatising profitable companies like PSO, PPL and the refineries and even the loss-making Pakistan Steel which is now making profit.
Portfolio investment depends on the climate in the stock exchange in Pakistan and how well the Karachi stock exchange index fares after 14,000. It is a come and go affair depending on profitability. Portfolio investment comes for profit in Pakistan and not for real investment.
The home remittances which reached the peak of $5.5 billion in the last fiscal year can increase further if the overseas Pakistanis develops a perception that the West particularly America is basically ant-Muslim. So if that perception gains ground then few Pakistanis would want to retain their earnings abroad and may prefer to send them home where they enjoy a higher interest rate.
Last year had been the best year for the FDI, portfolio investment and home remittances. Can that be repeated this year as well despite uncertain conditions and a continuing rise in violence in the country? Besides, this is the election year which may see political convulsions. So can we have more foreign investment in the months ahead? If it does not come, the balance of payments position of Pakistan can become far worse.
Foreign companies as well as Pakistani concerns are now making large profits and that is equally true in case of banks. That the foreign banks are remitting profits home means a heavy demand on the foreign exchange resources of Pakistan and that consumes a large part of the foreign investment.
The real bottleneck in the area of the current account is the services sector. While the expenditure on this account is $ 4.51 billion, the revenue is 937 million dollars resulting in a service sector deficit of over three billion dollars which is indeed a very large gap. Shipping consumes a great deal of the money. The import of goods worth $32 billion would need a great deal of shipping which contributes to the inflated services sector payments.
Despite the handicap and the competition abroad the textile industry has been able to export textiles worth over 10 billion dollars last fiscal year which is 10 per cent more than the exports during the preceding year. Although the exports last year fell below 10 per cent, the textile exports rose by 10 per cent in the preceding year but it was below the 20 per cent target growth. But the textiles have improved their share in the overall trade by four per cent and raised their total to 59 per cent of the total exports.
Evidently the future of Pakistans exports depends largely on the future of the textile exports in an exceedingly competitive area but the textile industry is dissatisfied with the incentives announced by the government in the new trade policy, particularly the spinning mills and they are talking of a shutdown strike to drive home the point that they can throw a lot of workers out of employment.
Even the minister for textiles Mushtaq Ali Cheema does not want to give far more financial concessions to the spinning mills keeping in view their elementary performance but he has promised an overall package for the industry.
It is a matter for debate whether the country is gaining more foreign exchange through the spinning mills or losing more foreign exchange. A proper commission should study this issue and come out with its recommendations. Meanwhile the textile mills want the import of three million more bales of cotton from India over what was imported last year. So the net gain to the country should be clear before the cotton import spree gains greater momentum.
Exports of Pakistan face tough competition because of the conditions at home where the goods are produced. Exporters face a high cost of production. Power supply is as fitful as the prices are high and the water supply presents similar challenges to the industrialists in major cities.
Inflation is high in Pakistan and industrial inflation is higher than consumer inflation of eight per cent. Production dislocations are too many, the holidays are quite many and strikes are frequent for political and other reasons. Transport is too costly and the Karachi Port Trust is an expensive port. Workers are not literate and skilful enough and not quite disciplined. Their productivity is very low compared to the wages. All these enhance the cost of production and transportation.
The new trade policy offers no major incentives, say the businessmen. The leather industry in particular feels shabbily treated. There is nothing new in the trade policy, they say, as positive incentives are needed. This is not the atmosphere in which far higher exports are possible.
Now instead of financial concessions to the industry, or in addition to them, the government makes payment for research and development and now each industry wants that. But the government has to be careful in the WTO as it may be accused of subsidising the exports. We need instead an export economy that depends less on the government and more on its own devices instead of a constant demand on the government for more concessions and their frequent denial.
The fact remains that we plan to have imports of 32 billion dollars and meet the currently planned 19.2 billion dollar exports target which leaves a large gap of 12.8 billion dollars. The World Bank and the Asian Development Bank have been cautioning Pakistan that it wont be able to sustain such heavy deficits and also maintain high growth rates. They want Pakistan to do far more in the area of exports. We have signed a free trade area agreement with China under which bilateral trade is to increase to 15 billion dollars within five years. If we export enough to China from now onward, the trade deficit can be reduced.
We have finally landed in a situation in which a prime minister wants a higher export target and then try hard to achieve that and fail and a commerce minister Humayun Akhtar Khan who wants a modest target and achieve that in full and declare his policy a success. But instead of the 20 billion dollar increase in exports which Shaukat Aziz wanted and 18 billion dollar which Humayun Akhtar preferred, they have struck a compromise on 19.2 billion dollar exports which means an increase of 6.78 per cent which is in consonance with the rate of economic growth.
http://www.dawn.com/2007/07/26/ed.htm#4
