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Monday, July 17, 2017

Worries Over External Account Compound

There has been growing concern over Pakistan's external accounts in the period when the government was in turmoil after the findings of a joint investigation on Prime Minister Sharif's involvement in money laundering were announced.

In light of the JIT findings, the IMF has released a report on the economic situation in article IV, in a politically burdensome environment where the opposition and Sharif reject the prime minister's resignation.

The IMF 's observations on the fragility of the external sector and the inadequacy of foreign exchange reserves were added to concerns about deterioration in the external sector' s soundness.

With the situation unstable, the government is seemingly hopeful.

Pakistan's foreign exchange reserves (excluding banking system foreign exchange) declined from $ 18.2 billion at the end of December 2016 to $ 16.2 billion by July 7.

At this level, foreign exchange reserves are sufficient to finance the imports of just three and a half months or "comfortable" below the IMF's point of view.

These reserves include $ 3.6 billion from SBP derivatives. The International Monetary Fund (IMF) says a $ 3.6 billion forward position could put further pressure on the reserves.

The International Monetary Fund also said the vulnerability of the external sector has increased due to the current account deficit expansion and the increase in the mandatory repayment obligations related to the China-Pakistan Economic Corridor (CPEC).

According to the latest data released by the Pakistan Bureau of Statistics, exports to FY17 fell 1.63% to $ 204.48 billion, imports rose 18.67% to $ 530.226 billion and trade deficit increased 36.32% to $ 32.57 billion.

Remittances fell 3pc to $ 19.3bn as Pakistanis living in Saudi Arabia and other Gulf countries began to feel a pinch of economic hardship in their host countries.

Fear of analysts that after sending a tax (100 Saudi Riyals per month for nonprofit immigrant families), remittances from our country are likely to continue to decline after the cost cuts introduced in the kingdom.

Economists have long warned that the political and economic changes in the Gulf state and the reliance on too much money for remittances could be hurt because the UK and US job market is no longer favorable to foreigners as before.

According to the latest statistics, trends in remittances from these countries are declining, and if this trend continues, the fiscal deficit in FY17 has already increased from $ 4.58 billion to $ 10.641 billion in the previous year for 11 months.

During the 11 months of FY17, private portfolio investment had a negative impact of $ 410 million during this period, even though the public sector's foreign portfolio investment showed a good inflow of $ 1 billion.

In FY17, foreign direct investment of $ 2.22 billion for the first 11 months increased by 8.6% over the previous year. Analysts have not seen improvement in foreign portfolio investment flows due to political uncertainty.

FDI inflows are expected to continue to increase as CPEC-related projects progress. However, their impact can be somewhat offset by the repatriation of foreign companies and individuals working in Pakistan.

Borrowing more money from multilateral lenders is also an option, but in the politically charged election year, the political cost of such a move is too high. In addition, it would be difficult to meet loan conditions that could include painful reforms.

Already high debt and GDP ratios do not leave enough space for large tables anyway.

Issuance of sovereign treasury bonds can be a dangerous move in which international investors have more options available and can only be enticed with high yields that are not sustainable in the long run.

Foreign debt management costs have reached a very high level due to the excessive foreign debt the government and past governments have accumulated.

In the third quarter of FY17, external debt increased to $ 522.8 billion. This amounted to just over 25 percent of our total exports in fiscal year 17 and 20 percent of our foreign reserves.

The overall foreign exchange reserves, including foreign exchange transactions held by the banking system, are less than $ 22 billion, compared to an annual income of $ 53 billion.

However, as of the end of May 2017, the overall balance of payments increased by $ 177.5 billion.

In a recent report, Moody 's, one of two major global credit rating agencies over the last two years, speculated that Pakistan' s economic growth would be lower than official expectations due to the slow realization of CPEC.

The B3 country's credit rating has not changed, which means that investment in Pakistan's bonds is highly speculative.

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