External Account: Challenging period to come ahead

Faizan Saleem

The first half of the financial year closed with a lot of economic apprehension as the major macroeconomic indicators have performed below the par as compared to the previous year.

The external account, which performed exceptionally well in the previous fiscal year, remained week at the end of first six months (Jul-Dec) and it is expected that external account would face more challenges in the later half of the financial year due to rising oil consumption and fading foreign reserves.

The Pakistan currency remained under severe pressure during 1HFY12 and depreciated by 5 percent against the US dollar owing to higher import payments and halt in financial inflow to the country.

On the other hand, the net foreign reserves held by the State Bank of Pakistan (SBP) also dwindled by 13 percent since Jun 2011, registering a slippage of $2 billion. Thus, the current account once again landed into normal deficit trajectory after witnessing positive numbers in the previous fiscal year.

The Pakistan economy should show gratitude to the overseas Pakistanis who have resisted the external account to turn into an aggravated situation by sending record remittances. Remittances went up by 19.5 percent during first half of financial year with Dec-11 figures higher by 26 percent YoY and 17 percent MoM.

The weak global economic outlook has blown hard the exports of the country which performed exceptionally well amid higher global commodity prices during the previous year. On top of that, the import bill is ballooning continuously, highly dominated by hefty oil import bill amid rising gas crisis prevailing in the country.

The next six months could be very crucial for the external account of the country. Any rising tension between the Iran and United States could bring volatility in the prices of oil. Although repayment of IMF loan starting this year is already a known factor, hence the declining foreign reserves could bring another fall of PKR.

Remittances had been solely keeping the things to balance, but declining foreign investment and rising deficit requires more support from exports and foreign investment. Both will depend on resolution of structural supply side issues, better law and order and favorable investment climate which the ruling government is not able to provide at the moment.

http://www.halaltamweel.com/2012/01/16/News/External-Account--Challenging-period-to-come-ahead/3297/Story.aspx