RIZWAN BHATTI

KARACHI: The State Bank of Pakistan (SBP) said on Friday that the external account remained a cause of concern for the macroeconomic stability and the brewing Balance of Payments (BoP) challenges warrant concerted and timely measures to preserve the macroeconomic stability and growth momentum.

According to SBP’s Second Quarterly (Oct-Dec of FY18) Report, “The State of Pakistan’s Economy”, midway through the fiscal year 2017-18, prospects for Pakistan’s economy surpassing last year’s growth rate appear strong. Inflation remained low and fiscal position consolidated on the back of a rebound in revenue collection. However, risks to overall macroeconomic stability have increased due to widening imbalances in country’s balance of payments.

Pakistan’s balance of payments position remained under stress in first half of this fiscal year, as the rise in imports overshadowed a healthy turnaround in foreign exchange receipts from exports and workers’ remittances.

Despite the much-needed recovery and a double digit growth in exports, Pakistan’s balance of payments continued to reel under the pressure of surging imports. The current account deficit increased to $7.9 billion in H1-FY18, from $4.7 billion in the same period of last year. Higher financial inflows compared to last year, albeit welcome, proved insufficient to rein in the decline in the country’s FX reserves, the report said.

In the short run, however, the government should complement the needed fundamental policy changes with stop-gap measures, to prevent a further drawdown in official foreign exchange reserves as gross liquid reserves have already fallen to less than three months of the country’s import bill, unencumbered reserves are even less.

Some steps have been taken to contain import growth e.g., imposition of regulatory duties and LC margins on consumer imports, but their scope and depth need to be increased to ensure quick and effective results.

SBP said that given the expected volume of current account deficit in coming months along with the size of maturing loans, it has become imperative for the government to ensure that estimated official inflows for the remaining part of the year are realized.

In addition, debt sustainability issues may prop up going forward, and this brings into equation the need for a sustainable stream of foreign exchange earnings in the future, as well as the increase in country’s debt repayment capacity, the report mentioned.

The latter ultimately hinges upon a perceptible improvement in the country’s tax base, and decisive actions to address critical issues like the falling number of direct taxpayers, recurring circular debt, and costly support price mechanism in the commodity market.

According to SBP, while the real sector of the economy presents an encouraging picture, the external account remained a cause of concern from the macroeconomic stability standpoint.

“In the larger scheme of things, Pakistan’s economy has reached a familiar juncture; the brewing BoP problem warrants concerted and timely measures to preserve the macroeconomic stability and growth momentum,” the SBP said and added that if the economy regains its balance, fundamentals are strong enough to push it towards a high growth path.

With a drop in private and official financial inflows, the burden of financing the current account fell on country’s FX reserves. The maturing external debt obligations and the consequent drop of some $ 2 billion in the FX reserves during H1-FY18 made it inevitable for the country to resort to the international capital market. Consequently, Pakistan floated a Eurobond and Sukuk for a cumulative $ 2.5 billion in December 2017, the report informed.

The recovery in the global economy triggered buoyancy in the commodity market as oil prices rallied to a 3-year high, while industrial metal prices too surged steeply as demand outpaced supplies. These developments had two major implications for Pakistan. First, domestic fuel prices increased steadily, as the government passed on the impact of rising global prices to domestic consumers.

Second, the increase in commodity prices (especially oil) put an upward pressure on imports, which were already strong on the back of domestic demand. Although the import growth subsided as the year progressed, payment volume was large enough to offset the export and remittance gains; the resultant deficit in the current account was too large to be financed by private and official financial inflows.

The report said that with the payment burden falling increasingly on the country’s FX reserves, sentiments turned further against the PKR, leading to an increase in FE-25 deposits and high kerb premium through most of the period. The issuance of the Eurobond and Sukuk in December helped contain the reserves depletion to some extent, but the size of these floatations was still insufficient to placate the interbank foreign exchange market. Consequently, the Pak rupee depreciated by 4.4 percent in December 2017.

Moreover, the recent reversal of tighter import regulations for used car dealers, and duty exemptions on imported steel items (also produced locally) for certain CPEC-related projects, runs counter to the purpose of achieving external sector stability.

In addition to a sharp increase in the trade deficit, higher profit repatriation by multinational companies operating in Pakistan, dented the growth in worker remittances and contributed to the rising current account gap, the report added.