FY2007: focus on current account
deficit, FDI and public debt

Current account deficit by the end of current FY is likely to swell to around $8.0 billion or around 5.4 per cent of GDP, primarily because of an increased trade deficit of around $13 billion. It would be the highest during the past seven years
By M. Sharif

Performance of current account deficit, FDI and public debt needs special attention because of their extraordinary importance for the national economy. They are vital in short and medium term perspective to achieve and sustain high economic growth, alleviate poverty, reduce inflation, have stable rupee-dollar parity and provide solid base for self-reliance of the economy. Performance of current account deficit and public debt, over the past three years in general and during outgoing fiscal year in particular calls for more vigilance. Against this, the performance of FDIs, during the current fiscal year has been beyond expectations.

Current account deficit
Pakistan has a history of living with trade and current account deficit of manageable magnitude. It also has a history of contracting foreign loans and being blessed with substantially large amount of remittances by the expatriates. Pakistan’s commitment to the US in its war against terrorism facilitated financial assistance by the US and multi-lateral donors that has been pouring in over past few years. The quantum of remittances has also increased to more than four times during the past five years to more than $4.0 billion a year. It is likely to be around $5.0 billion by the end of current fiscal year.

According to a study conducted by the Centre for Strategic and International Studies, reported in NYT, Pakistan has received roughly $10 billion from the US since 2002 under various heads: $5.6 billion in reimbursements, $1.8 billion for security assistance, $1.6 billion for budget support and $900 million for health, food aid, promotion of democracy and education. It averages to around $2.0 billion a year. Another analysis states, “Pakistan has received a massive liquidity injection of about $50 billion in remittances, aid, debt relief, earthquake assistance, FDI and privatisation proceeds during last five years.” Obviously, substantial part of the liquidity injection has been helping in tiding over current account problem which otherwise would have been quite troublesome. A closer look shows that main problem causing current account deficit is high trade deficit that consumes all sorts of liquidities coming from abroad.

Current account deficit has been on the increase during past three years. Prior to it, it was positive (3.8 per cent by the end of fiscal year 2002-03) and the government rightly felt proud of it publicly but the fact is that even then foreign trade was in deficit. But it was not that large to consume all foreign inflows. Current account deficit by the end of current FY is likely to swell to around $8.0 billion or around 5.4 per cent of GDP primarily because of swelling of trade deficit to around $13 billion. It would be the highest during the past seven years. The figures reveal that during first nine months of current FY, current account deficit increased to $6.0 billion against $4.3 billion during the corresponding period of last fiscal year. The increase is because of the trade deficit of $11.0 billion during first nine months of current FY against trade deficit target of $9.6 billion for the last fiscal year.

Import of some essential items to keep industry, agriculture and economy going is indispensable. It certainly raises import budget particularly when the economy is in the expansion mode as has been witnessed during the past four years. Industry related imports during the first nine months of the current fiscal year were registered to the tune of $11.0 billion, oil imports stood at $5.23 billion with an increase of 13.0 per cent over last year. Oil import bill is anticipated to be more than $7.0 billion by the end of current fiscal year. Like- wise import of other items related to economic growth at enormous import bill is understandable.

What is surprising is that telecommunication which is fetching perhaps highest FDI is costing a heavy import bill leaving aside high import bill of other consumer durables and non-durables. During first nine months, import bill related to telecom has hit $1.6 billion mark and by the end of the fiscal year it is expected to be more than $2.0 billion. Import bill of food items has also hit $2.3 billion mark during first ten months of the current fiscal year and is likely to be around $3.0 billion by the end of the year. One should not feel alarmed by these import figures but for the reason that our exports are not increasing at a pace they should have. This is the crux of the issue.

In order to reduce current account deficit, it is imperative to give boost to exports. Our exports are faced with a number of problems ranging from textile-centric with least value addition to comparatively high cost of production, inelasticity in exports and limited export markets. This obviously necessitates adopting new export regime to exploit country’s full export potential. The problem of current account deficit can be squarely addressed by bridging the trade gap. It is the only viable option that should be utilised at the earliest. But, because of certain subtle ground realities such as power crisis, high cost of production, low productivity and competitiveness in industrial and agriculture sector, it is unlikely if exports can make real big head way in near future notwithstanding the fact that the government has laid a very ambitious programme of doubling exports during the next five years. Exports have doubled to more than $17 billion during the past around seven years. That is why government’s dependence on foreign inflows is on the increase. The risk of depending on foreign inflows including commercial borrowing from international money market by floating various bonds will only add to foreign debt that is already swelling in absolute terms.

Foreign direct investment

Foreign investment has swelled to $5.97 during first ten months of the current fiscal year, a figure that has surpassed full year’s target of $5.0 billion. FDI in 2000-01 was $484.47 million and $3.87 billion in last fiscal year. Substantial increase in FDI during current fiscal year is really a positive news and augers well for the economy by any stretch of imagination particularly in the backdrop of ongoing judicial and political crisis in the country going on for around 10 weeks. They could have deterred investors. On the contrary, the investors and rating services have reposed confidence in the economy and government policies. The Standard & Poor’s Ratings Services on 18 May 2007 assigned B+ senior unsecured foreign currency debt rating to Pakistan’s proposed global bond issue of up to $1.0 billion. Confidence in the economy is likely to persist and it is expected that by the end of current fiscal year foreign inflows are likely to increase to more than $7.0 billion. While all this sounds well and is encouraging, the basic question is: What is exactly the nature of FDI? In which sectors of economy is it being spent? Is it going to help boost exports, create employment and create more avenues for further FDI?

According to an analysis acquisition of banks and their privatisation proceeds has contributed substantially towards accelerating FDI. In addition to this, launching of the Global Depository Receipts of OGDCL, MCB from UK and receipts of Euro bonds helped in giving boost to foreign portfolio investment in stocks. Equity securities and portfolio investment during first ten months were recorded $847.6 million inclusive of CDRs of the MCB worth $150 million and $120 million of OGDC. The second important point is that foreign investment is keeping pace: in April it was recorded at $418 million against $933 million in March. Tele-communication, real estate, hotels, insurance, power sector, oil and gas exploration are some of the sectors of economy that are attracting investment. Most of the foreign investment is coming from neighbouring Gulf States that have surplus liquidity because of increase in the price of oil in global market.

Privatisation of large number of public enterprises and banks and very little investment in new industrial units hardly creates job opportunities and technology transfers for Pakistan as has been experienced by China. That is why that unemployment in the country is on the increase despite increase in the level of FDI. The other matter of concern is that FDI through privatisation “target the domestic market such as telecommunication and real estate and thus have a low potential for improving the balance of payment.” For the latter, the government has to depend upon foreign inflows of all sorts as has been pointed out earlier. This underscores the importance of changing the track of FDI keeping in view the Chinese experience and the upcoming experience of the Indian economy.

FDI has many positive points to offer but it all depends how it is exploited by managers of national economy. In our context, in long-term perspective it is feared that inflows of investment focused on domestic market could be drain on our meager forex earning because outflows of profit repatriation is likely to increase gradually from its present level of around half a billion US dollar to much more than that.

Public debt
The government rightly takes the credit for having reduced public debt from more than 100 per cent of GDP around seven years earlier to around 50.0 per cent at present. But, the main purpose of taking a look at the economic indicator is increase in absolute terms, cost effectiveness of the debt in view of rising interest rates and its implications in the mid and long-term perspective and government’s efforts to address the problem.

According to debt policy statement issued by the finance ministry recently, total domestic debt stood at Rs2.422 trillion by the end of November 2006. It has increased from Rs2.312 trillion at the end of last fiscal year 2005. It is still on the increase because of increase in fiscal deficit during past two years. According to ADB this fiscal year it could be more than 4.5 per cent of GDP. The net increase of Rs1.532 billion represents a growth rate of 7.1 per cent that is slightly more than average growth rate of 6.6 per cent from fiscal year 2000. It is quite likely that domestic debt would end at slightly higher growth rate of 7.1 per cent by the end of current fiscal year. Foreign debt and liabilities of the country have settled close to $39 billion by March 2007, showing an increase of $1.623 billion over FY2006. The foreign debt started increasing gradually from FY2005 when the government started offering global bonds to raise foreign exchange in addition to annual borrowings of around two billion US dollars from foreign donors to meet current account needs. Since then the trend of borrowing from international financial market has continued. It will increase the debt burden if sufficient revenues are not generated from within the country.

Standard & Moody’s Ratings Services has made somewhat similar observation when it stated, “the long-term challenge for the government remains to rise significantly from the current level, and to demonstrate that the current pro-market, pro-growth set of policies will be sustained during successive administrations.” Governments inability to put economic fundamentals on correct track that is visible because of high current account deficit, domestic market focused FDI and resort to increase public borrowing to manage economy during the current fiscal year, gives a clear indication that a lot is more desired to be done to make economy self-reliant.

Conclusion:
Current fiscal year is likely to end with a few positive indicators and benefits accruing to privileged sections of the society. But, the three important economic indicators deliberated above show that government has preferred to adopted easy route of giving boost to growth through external resources rather than making corrections, the hard way. It could have serious implications for the economy in long and even medium term perspective. Will budget of forthcoming fiscal year take care of weaker indicators that have shown further downward trend during current fiscal year instead of improving? Budget for FY2008 will be closely watched by analysts for this very important reason.



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