External sector performs better
EXPORT earnings and home remittances were higher and foreign investment also witnessed a rising trend in first seven months of this fiscal year, compared to the same period last year.
Consequently the current account posted a small surplus against a huge deficit in the year-ago period, and the overall balance of payments also shrank to one-third over the comparative period.
Inflation in January inched up to eight per cent plus, chiefly due to higher food prices providing a key justification to SBP to keep its reverse repo rate flat at 9.5 per cent for February-March.Large-scale manufacturing growth maintained the rising trend in December — the latest month for which data is available — and overall LSM expansion in 1HFY13 was about three times higher than what it was during 1HFY12. This was seen as one of the benefits of SBP policy rate easing of 250 basis points between August and December 2012.
Some of the industries that posted double-digit expansion in output included liquefied petroleum gas, kerosene oil and high-speed diesel, paper and board, some chemical, food and pharmaceutical items, iron coils, sheets and stripes, buses, cooking oil, blended tea, wheat thrashers, power looms, tractors, electronic transformers and power generating machines.
The list of the industries that saw double-digit contraction in production is shorter, but includes major ones like furnace oil, sugar, nitrogen fertiliser, pig iron, trucks, jeeps and cars and light commercial vehicles, sugarcane machines, shuttleless looms and deep freezers, etc.
Rupee lost 3.8 per cent value against dollar between July 1, 2012 and February 20, 2013 primarily due to external debt payments in the absence of fresh external borrowings but also due to repatriation abroad of increasing profits and dividends of multinationals operating in the country.Reports of about half-a-billion dollars IMF loan repayment in February initially caused panic in both interbank and open currency markets. But the central bank sprang into action: it not only bought dollars from some selected banks but relevant officials also spoke to bankers and persuaded them to remain calm and ignore speculation-driven import demand for dollars.
The central bank also issued stern warnings to exchange companies indulging in selling dollars at the rates higher than the ones displayed at their outlets and also invited public complaints against non-compliance of this instruction. As a result not only the rupee recovered some of the initial losses but the pressure on forward dollar buying also eased off. The rupee, however, lost about half-a-per cent of its value against the dollar in the first three weeks of the month.
The rupee depreciation has accelerated encashment of overdue export bills and retarded growth in import bills thus contracting the trade deficit. But it has disturbed the budgeted projections of the cost of external debt payments in local currency thus contributing to expansion in fiscal deficit. Lesser –than-targeted revenue collection is making the situation even more challenging. And fiscal authorities are relying on excessive borrowings from commercial banks.
Meanwhile, external debt payments and forex outflows through repatriation of dividends and earnings of multinational companies continue to squeeze foreign exchange reserves.
The KSE 100-index is still on the rise as it has been for quite some time and the interbank and open currency markets are behaving in line with fundamentals.
Export earnings that showed a marginal year-on-year decline in July and August have been on the rise since September 2012 and there are indications that the rising trend may continue on the back of better performance of textiles and food and of non-traditional items like cement and jewellery.
Senior officials of Trade Development Authority of Pakistan say overall FY13 exports are projected to cross $25bn.
But textile millers say that a lower cotton crop this year, coupled with delays in shipments of export consignments due to frequent business closures and sits-in are frustrating their efforts to earn more foreign exchange.
Whereas poor law and order situation is a common issue for all businessmen rice exporters say that still-higher domestic prices due to fall in Basmati production may keep them from earning even $2 billion during FY13.
Total inflows of home remittances in seven months to January have been higher in this year than in the last year but monthly inflows in January alone shows a slight decline. Bankers and executives of foreign exchange companies say it is too early to interpret it as the onset of the declining trend.
“Monthly remittances are down basically because of lower inflows from Dubai (which fell to $96 million in January 2013 from $124 million in January 2012). We have a history of much wider fluctuations (in remittances from Dubai). I don’t think it’s a big deal,” said an official of National Bank of Pakistan. But reports appearing in the Gulf media suggest that localisation of jobs in Dubai and increasing availability of workforce from Bangladesh and other countries have started affecting earnings of Pakistanis living there.