Strong external account – and more
The fiscal year 2010-2011 tested Pakistan’s economy under extreme internal and external pressures. But the economy started improving in the second half of the fiscal year and showed some signs of recovery, mainly driven by external sector buoyancy.
This is evident from the overall strength of the external account in the first ten months (July-april), alongside the continuing fall of capital and current account receipts in the same period. Policymakers are paying lesser heed to request the resumption of stalled IMF lending program. As optimistic exports and remittances’ outlook, return of foreign investors to stock market, recently lined-up foreign direct investment and robust forex reserves of $17 billion have raised the spirits of policymakers. Of this amount, reserves held by the State Bank of Pakistan stood at $13.7 billion and by the banks at $3.4 billion.
The strong recovery of Pakistan’s external accounts is further affirmed by the Asian Development Bank, which recently became third party guarantor to ensure that investment in Pakistan is fully protected. This is termed as highly positive for attracting FDI in major energy sectors.
Officials of the Trade Development Authority of Pakistan have forecast trade agreements with half a dozen countries this year for boosting exports under product-wise strategies and development of sustainable new markets. The preferential trade agreement signed with Indonesia in September is an important in this direction. This will counter to some extent the massive decline in overall foreign investment. The targeted FDI inflows will help industries like oil and gas, edible oil, steel-making, automobile production and telecommunications. The Board of Investment affirms the FDI estimates of more than half a billion dollar to flow in before December this year.
Pakistani stocks being the cheapest in the region have also started turning foreign portfolio investors into net buyers from the earlier net sellers.
Categorically, the 14.5 percent rise in exports by the end of 2010-2011 was constituted by 62 percent buoyancy of the textile sector and 17 percent of the food sector, while leather products contributed 11.5 percent to exports growth.
The other important factor of workers’ remittances is expected to cross $11 billion this year, based on the recorded $9.1 billion mark in the first ten months (July-april of 2010-11) as against $7.3 billion last year. The remittances from Saudi Arabia recorded massive growth of 36.7 percent, followed by EU (38.3 percent), UK (34.9 percent) and UAE (25.7 percent).
The central bank sees the robust external account to lead to a “build up in reserves and thus net foreign assets (NFA)”; a contributing factor to financial market stability. Experts stress on the need for an economic reform agenda, in order to bring about a substantial and meaningful change in the dismal state of the economy. It is imperative to strive for fiscal consolidation, reduce fiscal deficit and develop the infrastructure and the overall environment to attract greater investment. Without improvements on these fronts, only a strong external account will not be sufficient for the growth of the national economy