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[url="http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=57320&Cat=9&dt=7/12/2011"]Pakistanââ¬â¢s external sector - Dr Ashfaque H Khan - Tuesday, July 12, 2011[/url]
Pakistanââ¬â¢s external balance of payments improved significantly in 2010-11 on the strength of the robust exports and remittances, and strong inflows on account of the Coalition Support Fund and flood-related grants. In his budget speech, the finance minister made special mention of the performance of the external sector, in particular exports and remittances.
The finance minister has chosen to discard the neutrality that behooves him as a technocrat in favour of politically partisan reflections on economic matters. I would like to display the other side of the picture. Indeed, the minister should have a contingency plan ready for him to be able to meet the emerging challenges on the external sector in the current fiscal year.
It is a fact that Pakistanââ¬â¢s external sector has performed impressively. It is also a fact that exports and remittances have posted stellar growth. But it is also beyond dispute that the performance of the external sector is based on windfall gains and one-off developments, which are not likely to be repeated in the current year. This article reviews the performance of the external sector, quantifies the contribution of the one-off development in exports and examines the mysterious growth in remittances. Most importantly, it raises questions over the surplus of the current account balance.
After six years, Pakistan witnessed a current account surplus of $205 million in July-May 2010-11, owing to strong growth in exports and remittances. The political leadership and technocrats-turned-politicians would celebrate this as a grand success of their policies. But we need to go behind these numbers and find the reasons for the surplus in current account.
Any student of economics would know that saving-investment gap is identically equal to the current account gap (S-I=X-M). A surplus in current account means savings have exceeded investment. Pakistanââ¬â¢s savings rate is not only low but it declined sharply to 13.8 percent in 2010-11, from a peak of 20.8 percent in 2002-03. A decline of 7 percentage points in eight years. A surplus in current account in 2010-11 means the saving rate has exceeded investment. In other words, investment has declined sharply to sink below the already low savings rate. In fact, investment declined to a 40-year low at 13.4 percent of the GDP in 2010-11, against the savings rate of 13.8 percent, posting a current-account surplus of 0.4 percent of GDP.
Only four years ago (2006-07), the investment rate had reached an all-time high of 22.5 percent of the GDP but experienced a decline to 13.4 percent in 2010-11 ââ¬â a fall of over 9 percentage points in just four years. Such a sharp reduction in investment should be a matter of serious concern for the economic managers as it does not augur well for economic growth, job creation and poverty alleviation in the medium term.
Achieving a current-account surplus by drastically reducing investment is a bad idea. The people of Pakistan will pay a heavy price for this surplus in terms of low economic growth, more unemployment and more poverty. Should we celebrate the success in the external sector? I leave it to the finance minister and his economic team to decide.
Let me turn to exports. Pakistanââ¬â¢s exports were up 27.4 percent, to reach $22.8 billion in the first eleven months (July-May) of the last fiscal year. Textile manufacturers alone contributed 62 percent to the surge in exports. The contribution of textile manufacturers stems largely from the unprecedented surge in cotton and textile manufacturesââ¬â¢ prices in the international market.
Pakistanââ¬â¢s overall exports increased by $4.1 billion on account of the price effect alone. If Pakistanââ¬â¢s exports in terms of quantity are calculated on the basis of last yearââ¬â¢s price, the overall exports are estimated to have been reduced by over $4 billion, of which, textile manufacturers gained $3.2 billion on account of the surge in their prices. In other words, textile manufacturers contributed 78 percent to the additional gain in exports owing to the unprecedented increase in cotton prices in the international market.
This was a windfall gain, [color="#FF0000"]a one-time development,[/color] and not likely to be repeated this year. In fact, cotton prices have already started declining sharply in the international market. Furthermore, since the global economic recovery is fragile, the international demand for Pakistani exports is likely to remain weak in the current fiscal year. Hence, a weak external demand, declining cotton prices, domestic energy constraints and a deteriorating law and order situation, particularly in the major growth centres of the country, may keep exports growth flat or even negative in the current fiscal year.
[color="#FF0000"]The mysterious growth in remittances is also a matter of serious concern.[/color] Pakistan received $11.2 billionââ¬â¢s remittances in 2010-11, posting a growth of 25.8 percent. The Philippines, a major recipient of remittances, is witnessing a declining trend in these for the past one year. Their recent numbers suggest that remittances could increase by 3.9 percent in 2011 to reach $20 billion. It is well known that Filipino workers are in high demand in the Middle East (Saudi Arabia, the UAE, Qatar, Kuwait and other countries). These are countries where Pakistanââ¬â¢s expatriates also work. [color="#FF0000"][size="5"]How come remittances are growing by 3-4 percent in the Philippines and 26 percent in Pakistan? Is it not a mystery? The State Bank of Pakistan should look into this mysterious development.[/size][/color]
There is nothing to celebrate the success of the surplus in the current account. The surplus has been achieved by drastically reducing investment. Exports have performed impressively on account of a one-off event [color="#FF0000"]and the extraordinary growth in remittances is at best a mystery.[/color] Indeed, the external balance of payments is likely to come under pressure owing to adverse domestic and external developments.
The writer is principal and dean of NUST Business School at the National University of Sciences and Technology, Islamabad.
[center][size="5"]Remittances : [color="#FF0000"]Betting - Extortion ââ¬â Heroin ââ¬â Money Laundering ââ¬â Terrorism Etc., Etc., & Etc.?[/color][/size][/center]
Cheers![[Image: beer.gif]](http://www.skyscrapercity.com/images/smilies/beer.gif)
[url="http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=57320&Cat=9&dt=7/12/2011"]Pakistanââ¬â¢s external sector - Dr Ashfaque H Khan - Tuesday, July 12, 2011[/url]
Pakistanââ¬â¢s external balance of payments improved significantly in 2010-11 on the strength of the robust exports and remittances, and strong inflows on account of the Coalition Support Fund and flood-related grants. In his budget speech, the finance minister made special mention of the performance of the external sector, in particular exports and remittances.
The finance minister has chosen to discard the neutrality that behooves him as a technocrat in favour of politically partisan reflections on economic matters. I would like to display the other side of the picture. Indeed, the minister should have a contingency plan ready for him to be able to meet the emerging challenges on the external sector in the current fiscal year.
It is a fact that Pakistanââ¬â¢s external sector has performed impressively. It is also a fact that exports and remittances have posted stellar growth. But it is also beyond dispute that the performance of the external sector is based on windfall gains and one-off developments, which are not likely to be repeated in the current year. This article reviews the performance of the external sector, quantifies the contribution of the one-off development in exports and examines the mysterious growth in remittances. Most importantly, it raises questions over the surplus of the current account balance.
After six years, Pakistan witnessed a current account surplus of $205 million in July-May 2010-11, owing to strong growth in exports and remittances. The political leadership and technocrats-turned-politicians would celebrate this as a grand success of their policies. But we need to go behind these numbers and find the reasons for the surplus in current account.
Any student of economics would know that saving-investment gap is identically equal to the current account gap (S-I=X-M). A surplus in current account means savings have exceeded investment. Pakistanââ¬â¢s savings rate is not only low but it declined sharply to 13.8 percent in 2010-11, from a peak of 20.8 percent in 2002-03. A decline of 7 percentage points in eight years. A surplus in current account in 2010-11 means the saving rate has exceeded investment. In other words, investment has declined sharply to sink below the already low savings rate. In fact, investment declined to a 40-year low at 13.4 percent of the GDP in 2010-11, against the savings rate of 13.8 percent, posting a current-account surplus of 0.4 percent of GDP.
Only four years ago (2006-07), the investment rate had reached an all-time high of 22.5 percent of the GDP but experienced a decline to 13.4 percent in 2010-11 ââ¬â a fall of over 9 percentage points in just four years. Such a sharp reduction in investment should be a matter of serious concern for the economic managers as it does not augur well for economic growth, job creation and poverty alleviation in the medium term.
Achieving a current-account surplus by drastically reducing investment is a bad idea. The people of Pakistan will pay a heavy price for this surplus in terms of low economic growth, more unemployment and more poverty. Should we celebrate the success in the external sector? I leave it to the finance minister and his economic team to decide.
Let me turn to exports. Pakistanââ¬â¢s exports were up 27.4 percent, to reach $22.8 billion in the first eleven months (July-May) of the last fiscal year. Textile manufacturers alone contributed 62 percent to the surge in exports. The contribution of textile manufacturers stems largely from the unprecedented surge in cotton and textile manufacturesââ¬â¢ prices in the international market.
Pakistanââ¬â¢s overall exports increased by $4.1 billion on account of the price effect alone. If Pakistanââ¬â¢s exports in terms of quantity are calculated on the basis of last yearââ¬â¢s price, the overall exports are estimated to have been reduced by over $4 billion, of which, textile manufacturers gained $3.2 billion on account of the surge in their prices. In other words, textile manufacturers contributed 78 percent to the additional gain in exports owing to the unprecedented increase in cotton prices in the international market.
This was a windfall gain, [color="#FF0000"]a one-time development,[/color] and not likely to be repeated this year. In fact, cotton prices have already started declining sharply in the international market. Furthermore, since the global economic recovery is fragile, the international demand for Pakistani exports is likely to remain weak in the current fiscal year. Hence, a weak external demand, declining cotton prices, domestic energy constraints and a deteriorating law and order situation, particularly in the major growth centres of the country, may keep exports growth flat or even negative in the current fiscal year.
[color="#FF0000"]The mysterious growth in remittances is also a matter of serious concern.[/color] Pakistan received $11.2 billionââ¬â¢s remittances in 2010-11, posting a growth of 25.8 percent. The Philippines, a major recipient of remittances, is witnessing a declining trend in these for the past one year. Their recent numbers suggest that remittances could increase by 3.9 percent in 2011 to reach $20 billion. It is well known that Filipino workers are in high demand in the Middle East (Saudi Arabia, the UAE, Qatar, Kuwait and other countries). These are countries where Pakistanââ¬â¢s expatriates also work. [color="#FF0000"][size="5"]How come remittances are growing by 3-4 percent in the Philippines and 26 percent in Pakistan? Is it not a mystery? The State Bank of Pakistan should look into this mysterious development.[/size][/color]
There is nothing to celebrate the success of the surplus in the current account. The surplus has been achieved by drastically reducing investment. Exports have performed impressively on account of a one-off event [color="#FF0000"]and the extraordinary growth in remittances is at best a mystery.[/color] Indeed, the external balance of payments is likely to come under pressure owing to adverse domestic and external developments.
The writer is principal and dean of NUST Business School at the National University of Sciences and Technology, Islamabad.
[center][size="5"]Remittances : [color="#FF0000"]Betting - Extortion ââ¬â Heroin ââ¬â Money Laundering ââ¬â Terrorism Etc., Etc., & Etc.?[/color][/size][/center]
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