Sus­tain­ing ex­ter­nal sec­tor im­prove­ments

The Pak Banker - - 4EDITORIAL - Mah­mud Ahmed

THE ex­ter­nal sec­tor of the econ­omy has im­proved with a re­duc­tion in the cur­rent ac­count deficit as a re­sult of the drop in oil prices, ex­ter­nal bor­row­ings, sales of na­tional as­sets and higher work­ers' re­mit­tances. And helped along by the State Bank of Pak­istan's (SBP) for­eign cur­rency pur­chases and in­flows from the Coali­tion Sup­port Pro­gramme, the net for­eign ex­change re­serves have gone up to a fresh high of about $19bn.

How­ever, ac­cord­ing to the

latest quar­terly re­port of the SBP, for­eign di­rect in­vest­ment dur­ing the first nine months of fis­cal year 2015 not only de­clined over the same pe­riod of pre­vi­ous fis­cal year, but the amount was also "much smaller than the repa­tri­a­tion of prof­its/div­i­dends on ex­ist­ing for­eign di­rect in­vest­ment" The full year's SBP's fig­ures show that the repa­tri­ated amount on ac­count of for­eign di­rect in­vest­ment at Rs$1.327bn was al­most dou­ble the FDI in­flow of $709m. In­clud­ing the re­turns on port­fo­lio in­vest­ment sent abroad , the over­all repa­tri­ated amount jumps to $1.636bn.

The path to higher eco­nomic growth lies in self-re­liance to the max­i­mum pos­si­ble ex­tent, with­out which struc­tural im­bal- an­ces in the ex­ter­nal sec­tor would per­sist and the eco­nomic re­cov­ery would re­main frag­ile

Bar­ring Chi­nese cap­i­tal spend­ing in tele­com, re­new­able energy and the mo­tor­cy­cle sec­tors, no sig­nif­i­cant for­eign in­vest­ment was made. Even port­fo­lio in­vest­ment recorded a de­cline in the pe­riod un­der re­view.

Yet another is­sue of no less con­cern to the cen­tral bank is the 6pc yearly drop in ex­ports dur­ing the three quar­ters. The de­cline was broad-based but more sig­nif­i­cant in prod­ucts like cot­ton fab­rics, rice, jew­ellery and naph­tha. In the case of cot­ton yarn, quan­tum in ex­ports re­mained at last year's level but lower unit prices have pushed down the value of ex­ports.

In the case of debts, even the com­mit­ted loans were not fully dis­bursed. In the third quar­ter of FY15, debt re­pay­ments ex­ceeded the to­tal loan dis­burse­ment. In the first three quar­ters, the ex­ter­nal debt ser­vic­ing reached $4.1bn - or more than 23pc of the coun­try's ex­ports. This, the SBP says, calls for rais­ing the debt-re­pay­ing ca­pac­ity, par­tic­u­larly through ex­ports.

Hopes are be­ing pinned on for­eign in­vestors buy­ing stakes in eight state en­ter­prises - in­clud­ing the PIA and Pak­istan Steel Mills - by this De­cem­ber, as agreed with the IMF.

Go­ing by these trends in the ex­ter­nal sec­tor, it be­comes clear that the im­prove- ment is of a frag­ile na­ture, as has hap­pened so many times in the past. It can­not be sus­tained on a durable ba­sis un­less an ef­fec­tive im­port-sub­sti­tu­tion pol­icy for stim­u­lat­ing do­mes­tic and for­eign in­vest­ment is ac­tively pur­sued in ar­eas where the coun­try en­joys a do­mes­tic ad­van­tage.

For the time be­ing, the in­ter­na­tional mar­kets do not of­fer much room for sig­nif­i­cantly boost­ing, ex­ports leav­ing no other vi­able al­ter­na­tive but to go for an ef­fec­tive im­port-sub­sti­tu­tion pro­gramme. En­hanced re­gional trade may also help. The de­vel­oped mar­kets are cur­rently at a sat­u­ra­tion point. As ev­i­dent from the Greece episode, painful re­forms are en­forced on the bor­rower while the len­der is not pe­nalised for tak­ing reck­less credit risks. And fi­nally, the way the ex­ter­nal sec­tor has im­proved - a worn out mode - just pro­vides the coun­try a breath­ing space be­fore it moves from one cri­sis to another. A more durable macroe­co­nomic sta­bil­ity comes from bal­anced so­cioe­co­nomic de­vel­op­ment. While dis­cour­ag­ing un­nec­es­sary im­ports (es­pe­cially of pro­cessed food and lux­ury items), the SBP has stressed that the gov­ern­ment should "ac­tively pur­sue all pos­si­bil­i­ties to re­duce its de­pen­dence on im­ported energy". It has also iden­ti­fied items for im­port­sub­sti­tu­tion in such sec­tors as ed­i­ble oil, chem­i­cals, low-tech elec­tron­ics, val­ueadded plas­tics and the rub­ber in­dus­try.

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