Surge in the current account deficit
In the past, ministers used to brush aside such concerns arguing that foreign investment was pouring in and workers remittances were swelling. But now due to the political turbulence and the increasing violence, the foreign direct investment (FDI) is tapering off and foreign investments in privatisation has drastically slowed down. The home remittances are however increasing as Pakistanis abroad do not want to hold their savings there and be investigated by foreign governments. The portfolio investment from abroad has also plummeted since the emergency was clamped.
On the import side, crude oil price is very much on the high side after touching $100 a barrel and the cost of food imports is also rising. The Opec oil producers have tentatively decided not to increase the oil output and bring down the prices. The oil consumption in Pakistan is increasing by nine percent annually, despite the rising prices. Simultaneously, foreign trade deficit is increasing steadily and during the first six months of the year has reached over $7 billion. The fear is that at the end of the financial year, the total trade deficit may rise to $13 billion.
The IMF and the Asian Development Bank have cautioned Pakistan that it could not sustain large current account deficit in the long- run and it will have to take steps to rectify the situation.
The solution lies in stepped up exports, but increasing the exports is not easy. Factories are closing down for want of electricity or gas. In the Punjab 200-300 textile mills, big and small were closed last week for want of power or gas.
The small and medium enterprises have to play their part in increasing exports but they are also hurt by the shortage of power and frequent load-sheddings Pakistan cannot meet its textile production and export target for want of power.
Exports during the first six months of the year fell five per cent below the modest target. The textile export is confronted with new difficulties in view of the drift towards the global recession. There are serious problems in the US market which consumes quarter of the Pakistans textile exports. One set of American importers are reluctant to place orders for goods for fear the exporters may not be able to meet their target date for delivery because of political convulsions, violence and energy shortage.
Another set of American importers prefer not to buy textiles with the marking ‘made in Pakistan’ which is not popular in the US market at the moment and so some of them are shifting their purchases to India or Bangladesh. If the political uncertainties continue and production and exports are affected, Pakistan’s textiles exports will suffer more. There is a new opening for the export of Pakistani kino to the Russian Federation. Russia has removed many of the restrictions on the import of kino and Pakistan can benefit by that in the manner it has been benefiting with the removal of restrictions on citrus imports into China.
Pakistan however suffers from the loss of the $90 million fish imports to the European Union (EU). Eight months have past since the EU imposed the ban , but that has not been lifted in spite of Pakistan’s efforts. The ban on old PIA planes flying to Europe has been lifted but the ban on the fish imports has not been lifted, as enough efforts to clean up the trade have not been undertaken.
Pakistan has now removed the sales tax on marble and granite. The 2.5 billion tonne marble mines can be dredged for exports and for domestic use. Marble has a large market-- both domestically and externally. Jewellery exports can also increase and we can earn a good deal through the export of Swati emeralds after conditions stabilise there. There is a scope for large-scale export of furniture to the Middle East if the trade is organised properly. There has been a suggestion that soon there will be a surplus of over a million tonne of sugar which can be exported, but the ministry of industries is opposed to the export of sugar while mill owners want the TCP to export half a million tonne of sugar from the existing stocks. The government is afraid the results of the efforts to export sugar may be the same as the anfractuous effort to export wheat which created a serious wheat crisis. In addition, the cost of production of sugar is very high and exports will have to be subsidised in a big way.
The imports have been increasing for fear the rupee will be depreciate further and that will push up import prices. So the businessmen are importing in the hope of selling them at high prices after the expected devaluation. However, a fall of 1.3 million in the import of tyres and tubes during the last six months is a significant development.
Food prices continue to rise not only locally but globally adding to the hardships of the people.
Meanwhile, efforts are being stepped up to increase privatisation and sell more bonds abroad to earn more foreign exchange. But this may not be the time we may get the best price for the bonds. Overall strenuous efforts have to be made to improve the balance of payments and reduce the current account deficit as soon as possible and the bond sale should be the last of the options.