KARACHI – A hefty trade deficit of Pakistan had eroded the inflow of remittances and the impact of growth in exports in nine months of the current financial year. From July 2010 to March 2011, the country had sustained a trade deficit of $11.21 billion with exports amounting to $17.80 billion while imports expanded to $29.01 billion.
In the nine months of the current fiscal period, the country had received $6.54 billion remittances ($900 million more than the corresponding period of FY10) from expatriates while an increase in exports fetched $3.73 billion in additional foreign exchange from July-March period of FY11.
However, despite an increase in exports of $3.73 billion and almost $1.0 billion expansion in exports, the current account of the country was only surplus by $1.6 billion from July-February FY11.
In other words, practically speaking the country had received only $1.6 billion worth in foreign exchange as the trade deficit had wiped out the impact of remittances and growth in exports in this fiscal, sources told Pakistan Today. The current account surplus was a positive development for the economy, but the government should have contained the trade deficit to save the foreign exchange, strengthen reserves and balance of payment position, they said.
Meanwhile, the second quarterly report of the SBP reveals that the country’s external accounts posted a surplus of $1.6 billion during Jul-February FY11 compared to a surplus of $500 million in the corresponding period of the previous year. The improvement in the country’s external accounts owes to a significant fall in the current account deficit, since the financial account surplus declined considerably during the period under review compared to the same time last year.
All subheads of the current account contributed to the decline in the current account deficit with the largest contribution coming from current transfers that increased by $1.6 billion followed by $0.7 billion improvement in the services account.
Notwithstanding the contributions of the current transfers and services accounts, the most encouraging development during Jul-Feb FY11 was a 23.7 percent growth in exports despite a host of impediment factors. The report stresses the growth in exports appears to be a result of rising unit prices following a global economic recovery. The performance of exports so far indicates that if this trend continues, Pakistan would be able to post a new record for exports in FY11.
Unlike the current account, macroeconomic issues and government’s failure to convince international financial institutions (IFI) of its commitment to reforms, took its toll on the financial account. While foreign long term loans declined drastically from $1.7 billion last year to only $342 million, investments improved somewhat only due to absence of the $600 million repayments related to Sukuk that had caused the investments to decline in the previous year.
Resultantly, the financial and capital account surplus fell to $1.4 billion during the relevant period of FY11 from $3.0 billion in the corresponding period last year. This surplus nevertheless, helped in improving the country’s overall reserves, which reached an all time high of $18.1 billion at the end of February 2011. With ample flows on account of remittances and export proceeds entering the inter-bank forex market, the pressures on the rupee were relatively subdued during July-February 2011, consequently rupee depreciated by only 0.24 percent compared to 4.5 percent in the same period last year.
At its current pace, FY11 current account deficit is likely to be less than two percent of the GDP, which is a remarkable achievement given that just two years back the deficit was almost 6 percent of GDP. However, there is no room for complacency as the existing decline is mainly due to transitional reasons. The trade deficit is down due to rise in unit prices of traditional exports and could stagnate once prices normalise.
