July issue 2017
Out of Balance
The current drop in remittances is clearly a reflection of the economic slowdown in the oil-rich Middle Eastern countries — a direct consequence of a long-drawn declining trend in world oil prices. This region has remained our main source of remittances for decades, as millions of Pakistanis are gainfully employed there. The significant decline in remittances follows reports of thousands of expatriate workers, including Pakistanis, being fired by their local employers in Saudi Arabia without even clearing past dues.
We should be prepared in the not so distant future for a reverse exodus of Pakistani expatriate workers, when job opportunities in Saudi Arabia and the Gulf countries start drying up as a result of reduced public spending by cash-strapped governments. This situation is likely to be exacerbated by the war-like situation in the Middle East that is expected to last for years.
There had always been some suspicion that a part of remittances from the Gulf States was, in fact, whitewashed black money accumulated through bribery and other black dealings and sent abroad through informal, clandestine routes. This kind of ‘remittance’ is also likely to slow down considerably, because of the recent amendment to the law regulating the real estate market in Pakistan and tightening of banking as well as taxation laws in host countries.
According to the latest data released by the State Bank of Pakistan (SBP), overseas Pakistani workers remitted an amount of $17.46 billion in the first eleven months (July-May) of FY17 as compared with $17.84 billion in the corresponding period of last year, showing a fall of 2 per cent. The extent of shortfall does not look alarming, but it appears to be the first sign of a trend that needs to be watched closely as it may spell disaster for the country’s economy.
Home remittances had contributed a great deal in containing the current account deficit of the country within reasonable limits for almost three years, as exports continued to decline while imports kept increasing during the period. At the same time, foreign exchange reserves had come under increasing pressure due to amortisation of past loans.
The detailed SBP data has revealed that inflows from Saudi Arabia came down from $5.39 billion last year to $5.03 billion, denoting a serious fall of 6.57 per cent. Remittances from the UAE amounted to $3.9 billion, registering a decline of 0.88 per cent during the year. Major declines were witnessed in inflows from the US and UK as well. Workers’ remittances from the US fell by 3.22 per cent to $2.18 billion compared to $2.25 billion in the same period last year, while inflows from the UK decreased by 8.13 per cent to $2.08 billion from $2.27 billion a year earlier. The EU was the only region where inflows rose by 15 per cent to $425 million.
However, due to forthcoming Eidul Fitr celebrations, remittances during May 2017, went up to $1.87 billion, which were higher by 21.36 per cent and 3.77 per cent over April 2017 and May 2016 respectively. During the month of Ramazan, locally based international charity organisations also receive millions of dollars as donations and Zakat.
The total amount of remittances, nonetheless, may not touch the record level of $19.9 billion witnessed during 2015-16, even if inflows increase further during the month of June 2017, due to Eidul Fitr.
Meanwhile anti-money laundering laws in the US, the EU and many other countries have been tightened, because of which inflows from developed countries have been reduced significantly. Had our exports kept up the pace that they had attained by about 2012-13 and imports remained under control, the falling trends in remittances would not have caused the economy the jitters that it is experiencing currently.
What Pakistan can do to stabilise the situation for now is to remove the temptation of overseas Pakistani workers to remit their hard earned money through non-banking channels by equalising the inter-bank and open market rates.
The consequences of falling remittances are too worrying. In case borrowing is not preferred to make good the shortfall, then the foreign exchange reserves – which are not large enough in the first place – will come under intense pressure.
Pakistan’s Forex reserves have already fallen by $3.51 billion since October 2016, to $20.52 billion on June 2, 2017. Reserves held with the State Bank have dropped by $3.22 billion to $15.7 billion during the same period. Repayments on borrowed money have also started to pick up pace. Add to this the growing amount of profit repatriation by foreign investors and we come face to face with a dire situation on the Forex front and a serious deterioration in the balance of payments situation. Foreign investment inflows, in the meanwhile, have also tapered off, adding to the crisis. This last aspect is expected to turn positive as the early harvest projects of CPEC are launched.
According to the SBP, the country’s foreign exchange reserves have continued to weaken and further declined by over $358 million by the second week of June 2017, as the rising external debt payments had swallowed over $1.6 billion from the reserves.
Earlier, Pakistan’s foreign exchange reserves had declined sharply by $1.255 billion in the week ending June 2, 2017 as major external debt payments, including principal repayment of $750 million against Pakistan Sovereign Bond were due. Pakistan’s total foreign exchange reserves stood at $20.158 billion as on June 9, 2017 compared to $20.516 billion on June 2, 2017.
While the reserves held by the SBP had declined, those held by banks witnessed a slight increase. The SBP’s foreign exchange reserves declined by $410 million to $15.296 billion on June 9, 2017 compared to $15.706 billion a week earlier. On the other hand, with an increase of $52.4 million, reserves held by the banks surged to $4.862 billion on June 9, 2017, compared to $4.809 billion a week earlier.
The SBP reported that cumulatively, the country’s total liquid foreign exchange reserves fell over $ 1.6 billion in two weeks, from May 26 to June 9, 2017. The trend clearly shows that the country’s foreign exchange reserves will be under pressure by end June 2017, due to rising external debt payments and repatriation of profits by foreign investors.
The repayment of loans that Pakistan received from the IMF under its three-year Extended Fund Facility (EFF) programme is due to start from the next fiscal year, which will add to the deteriorating balance of payments situation. In the last fiscal year, the country’s Forex reserves increased by $4.4 billion to $23.1 billion at the end of FY16, supported by the IMF disbursements of EFF and the government’s external borrowings.
We can gloss over the not-so-happy Current Account situation as well by expressing hope that in the coming months exports would pick up in response to some of the measures announced in the current budget. However, even if this hope were to materialise, the trade gap is likely to remain significantly wide because of the expected jump in imports as the China-Pakistan Economic Corridor (CPEC) projects start taking shape.
The trend in exports in recent years is a cause of concern. Exports had come down to an eight-year low at $20.8 billion last year, despite preferential access to European markets. In the year 2012-13, exports had fetched as much as $24.5 billion. But since then, exports seem to have been caught in a recessionary mode.
The major component of Pakistan’s exports, which is about 60 per cent of the total exports, is made up of textile and related goods. But over the last three to four years, the textile sector has gone into despair because of a number of reasons.
The textile industry in Pakistan is said to have become unviable because of the heavily subsidised textile industries in the competing countries of the region. Declining exports, a shrinking domestic market and capacity closures are also a source of concern for the industry. This situation is said to have arisen out of high cost, energy shortages, obsolete technology, absence of zero rating, shortage of raw materials, marketing disadvantages, absence of institutional support and policy-implementation divide.
In order to make the textile industry viable and regionally competitive, the government needs to develop a textile policy and prioritise its implementation; abolish all the incidentals on export; ensure uninterrupted energy supply; reimburse all the pending genuine refund claims expeditiously, and impose regulatory duty on yarn and fabric import. If the total textile chain is made viable and existing yarn is converted into fabric in made-ups, it could, according to textile industry experts, trigger an estimated additional export worth $15 billion.
Pakistan’s trade deficit rose to $29.99 billion during July-May 2017 with the import bill rising to $48.53 billion and export revenue declining to $18.54 billion, according to the Pakistan Bureau of Statistics (PBS). This reflects a sustained poor performance for the second year in a row, as in the first eleven months of 2015-16, exports registered $19.1 billion, while imports were $40 billion. Thus in dollar terms, exports declined by 3.13 per cent in July-May 2016-17 in comparison to the year before and imports rose by 42 per cent.
The PBS revealed a trade deficit in services for the first 10 months of 2016-17 at $2.3 billion with imports estimated at $7 billion while exports registered $4.7 billion. In July-April 2015-16, total imports of services were estimated at $4.67 billion while imports were estimated at $6.9 billion, with a marginally lower deficit of $2.2 billion.
A source of serious concern is that the May 2017 data reflects a worsening trend when compared to April 2017 in lower exports and higher imports. PBS data indicates that while exports were estimated at $1.8 billion and imports at $4.99 billion in April 2017, the figure for May 2017 was $1.6 billion and $5.0 billion, respectively.
A fall in international commodity prices affecting our major exports, and the fiscal and monetary policies implemented over the past four years are partly responsible for the decline in exports.
The Pakistani private sector has consistently failed to spend its time, energy and funds on value-addition and has continued to export traditional items. Indeed, the list of export items has remained the same now for almost 50 years. As most of these items are susceptible to a good global crop year as well as the state of the economy of major buyers, their demand in importing countries takes a serious hit in situations beyond our control.
The major responsibility for the decline in exports over the last two years rests also with the decision to keep the rupee overvalued, making exports expensive and imports cheaper. Also, by not releasing refunds, liquidity concerns are generated among exporters, compelling them to procure loans, which simply add to their costs.
Since we lack the requisite financial resources, technology and adequate supply of power, it does not seem feasible to take the route adopted by India and China to improve exports and do import substitution to the extent that they have achieved. We could, however, adopt the trans-shipment route to lift ourselves out of the rut we have landed ourselves in.
This is an innovative mode and like any other innovation would be risky, but handled properly it would yield highly desirable results. The first step that needs to be taken in this regard is to drastically reduce the import tariff on raw materials, intermediaries and knock-down condition of consumer durables and fabricating equipment, to be followed immediately by letting the rupee actually float.
This will attract foreign exporters of mass consumption items to this country to establish manufacturing units inside Pakistan and produce items not only for a market of 200 million but also to export to regional markets, saving immensely on freight. Trans-shipment mode would also facilitate warehousing of items in knock-down conditions, which could be exported onwards after putting together these items (value addition) in our warehouses. This policy would perfectly dovetail into the CPEC efforts.