A nerve-soothing, breathing space in financial balances

[Naveed Yaseen]

By Sabihuddin Ghausi
Top economic managers appear to be a bit relaxed after having passed many sleepless nights only a few months ago. Foreign exchange reserves are up by one billion dollars in last six weeks and are close to $10 billion.

Rupee’s parity with dollar, falling both in inter bank and in kerb during September-October 2008, reflects relative stability. After peaking at 30 per cent, inflation is creeping downward. While the government has still not passed the full benefits of reduction in international oil prices to consumers, the headline inflation showed a marginal decline in December. It has given enough confidence to economic managers to announce last week that no further increase would be made in discount rate. For about last two years, the State Bank of Pakistan has gradually hiked discount rate to contain inflation and macro-economic imbalances..

The current account deficit in first half of the current fiscal year is still higher at $7.61 billion than $6.05 billion in the same period of 2007-08. But the rising trend was reversed in November and December 2008. Current account deficit dropped significantly by 43 per cent in December 2008 to $458 million from about $800 million in November, which in itself, was an improvement over previous months.

This improvement came from a visible shrinking in trade imbalance, falling of import bill, both on account of merchandise and services. Analysts believe that current account deficit by June 2009 will be much lower than $14 billion or 8.4 per cent witnessed in 2007-08, even if the target of $10.6 billion or 6.5per cent of GDP is not achieved.

“Inflows are gradually improving and outflows shrinking, though at a snail pace, which gives hope of a much better foreign exchange balance sheet in 2008-09,’’ remarked a banker who conceded that overall growth may be between 3-3.5 per cent for 2008-09 but, ‘’we will be much nearer to our stabilisation target than predicted by the Fund’’ His optimism comes from shrinking import bill, increasing remittances and slight improvement in foreign direct investment in the last six months, which he is confident will become more pronounced in the next half of 2008-09, provided there is no big political jolt or any security related incident.

It was in December 2008 that remittances from overseas residents showed a quantum jump of 40.53 per cent to $673.50 million. In first half of this year, remittances amounted to $3. 64 billion as against $3 billion remitted in the same period last fiscal year. A big fall in rupee value had led to a quantum jump in remittances in September amounting to $660.35 million. But a further rise in remittances in December when there was a relative exchange rate stability has given much needed satisfaction to the central bankers who are confident of getting a record of $8 billion by end June.

Much more satisfying is the flow of direct foreign investment (FDI) , up by 12.63 per cent at $2.32 billion in comparative six monthly review. This does not include any privatisation proceeds which have almost dried up..

A dramatic 75 per cent FDI growth in the financial services, from Rs615.9 million from $351.4 million, is the most conspicuous feature. Banking circles attribute this inflow to acquisition of shares of a major privatised Pakistani bank by a Malaysian peer and the capital for mergers and acquisition of banks in previous years.

Oil and gas exploration attracted $372.2 million which is 12.4 per cent higher than FDI amounting to $331.2 million. What is surprising is $300 million foreign investment in about two dozen industrial enterprises at a time when industrial production shows a negative growth of more than five per cent.

The upcoming power projects have attracted 87.4 per cent more FDI amounting to $66.7 million. Of this amount, $56.4 million is for thermal and $10.3 million for hydro projects. Communications attracted the highest amount of $770.5 million , construction $19.4 million, transport $24.5 million, and information technology $52.3 million.

The SBP statistics show more than 56 per cent growth in FDI in textiles amounting to $23 million, 185.6 per cent rise in sugar to $14 million, 317.4 per cent growth in petro chemicals to $21.2 million, 11 per cent increase in petroleum refining to $47.7 million, cement $29.1 million, basic metals $3 million..

“Many of the multinationals are moving ahead with expansion plans and quite a few foreign funded projects are in various stages of implementation’’, a banker said while explained the trickling in of foreign investment. Bankers are hopeful of FDIs and remittances showing growth in the coming months as macro-economic indicators get brighter.

But all is not well even though emerging positive features in national economy are creating a lot of hopes. Manufacturing is in a severe grip of an energy crisis, never seen before.

The first SBP quarterly report showed an across the board decline of 6.2 per cent in the large scale manufacturing sector during first quarter of 2008-09. Although no confirmed figures are available, indications are that this negative trend in industrial production is gaining momentum.

There have been demonstrations in cities of Punjab--Faisalabad, Lahore, Multan, Qasur and many other places-- against interruptions in electricity and gas supply.

A part of disturbance in electricity supply comes from Rs400 billion circular debt being shared by Wapda, KESC, IPPs, oil refineries, oil and gas distribution companies. The government is committed to IMF to solve this problem by March next but so far no indication is available of any headway being made.

Finance Advisor Shaukat Tarin says the government wants to settle this issue for all times by rationalising the energy tariffs which will be spelt out in an integrated energy policy.

Bold steps have been taken by the government in the last six months to manage fiscal deficit. Subsidies on gas and oil have been withdrawn to a significant extent and government is moving ahead slowly to address the subsidy issue on electricity. It continues to collect development surcharges on gas and oil.

On Wednesday, federal information minister said, R98 billion has been paid to commercial banks by the government and it intends to achieve a zero borrowing from State Bank by June next.

Mr Tarin also claims of visible improvement in current expenditure during the first two quarters of 2008-09. He is reported to have conceded that development funds were not being released this fiscal year because many government ministries and departments did not utilise all the development funds given to them last year.

An exercise is being undertaken to find out actual amount of this ”parked money’’ in banks from last year’s development budget before deciding on releases from 2008-09 budget. Sardar Assef, the new Deputy Chairman of Planning Commission, wants revival of five-year plans.

http://www.dawn.com/2009/01/26/ebr3.htm