Economy struggling

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Exports in the first two months of this fiscal year are down from last fiscal year, the expected double-digit growth in home remittances is no more in sight, and foreign direct investment remains subdued.


However, portfolio investment has picked up, and with relatively steeper fall in imports compared to exports, the trade deficit shrank marginally.


And foreign capital inflows have, by and large, eased pressure on current account and the balance of payments for the time being (see table).


External account worries remain, however, as Pakistan is to pay at least $3.4 billion in external debt payments this fiscal year.

Also, currency swap arrangements are being used to reduce the need for dollars in financing imports. The rupee-yuan swap agreement with China has become operational though bankers and businessmen say they have so far not seen any sizable financing of imports taking place under this arrangement.


Stalled growth of exports, slowdown in growth rate of home remittances, and external debt payments looming close, the rupee may come under pressure though it has remained stable in the first quarter of the current fiscal year, after losing about 10 per cent to the dollar in the entire FY12.


Inflation has started coming down, after the 150 basis points cut in the SBP policy rate in August and amid not-so-robust domestic demand. But any spurt in international oil prices may fuel inflation again, more so, as price fluctuations are now passed on to domestic market on a weekly basis. Federal government’s inflationary borrowing from the central bank is so far negative which is a help in the SBP’s fight against inflation.


The SBP is scheduled to revisit its monetary policy next month, and if it goes for another policy rate-cut as being demanded by trade and industry, industrial activity may pick up pace.


In July, large-scale manufacturing grew 0.6 per cent despite biting energy crisis and amidst a setback caused by politically-induced protests and the slack demand of textiles in debt crisis-hit eurozone. European Union has cleared the way for preferential treatment of Pakistani exports and if all goes well, Pakistan’s textiles as well as some other smaller categories would start benefiting from the next year. Though overall textiles exports fell just 1.5 per cent in dollar terms in July-August this year, exports of knitwear and bed wear, that rely much on the US and EU markets, witnessed a big decline of 14 per cent and 17 per cent respectively.


The agriculture sector looks better placed than the industry. Cotton harvesting has begun and the pace of arrivals of seed-cotton at ginneries suggests that the total output this year would outweigh last year’s record production of 14.8 million bales. Even after the monsoons that affected cotton fields in some areas, ginners say the total output would be somewhere between 15 and 15.5 million bales.


Sugar output in the current year is also being estimated to be higher than the last year’s. That is why Pakistan Sugar Mills Association has been pressing the government to allow exports up to 400,000 tonnes before cane crushing starts from the mid of October. PSMA officials say that 1.2 million tonnes of reserve stocks are available whereas the monthly domestic consumption is just 300,000 tonnes. Pakistan is set to produce up to 5.2 million tonnes of sugar this year, against 4.7 million tonnes last year.


Rice output is also being projected a little higher than the last year’s despite partial damage to paddy crops in Sindh and Punjab during the current monsoon.


Fiscal woes of the government continue because the growth in tax revenue is far from the targeted level and revenue collection is only marginal higher when compared to last year’s figures. That is why though the government is retiring SBP loans it had taken previously, it is doing so by borrowing more from the commercial banks.


Lower-than-required tax revenue compels the government to keep switching over from the SBP to commercial banks or vice versa for borrowing of additional money required to fill the budgetary gaps.


Now the Federal Board of Revenue has designed an amnesty scheme to broaden the tax net and generate more revenue. It has identified about 3.8 million individuals who have not been paying full taxes and is offering them exemption from previous tax liabilities by paying a one-time one per cent tax to get their assets regularised.


Prolonged power outages and suspension of gas supply to industrial units and captive power plants in Sindh and Punjab continue to take their toll on industrial productivity.


But some industries are still reporting an increase in production. These include some segments of petroleum industry like jet fuel oil, kerosene oil, lubricants and jute batching oil, LPG, jute goods, some chemicals and pharmaceuticals, cement, glass plates and sheets, hot and cold rolled iron sheets, stripes and plates, automobiles including buses, tractors, cars and jeeps and light commercial vehicles, cooking oil, tea, soft drinks and juices, woollen clothes, knitting wool and woollen blankets, leather, plywood and soaps and detergents, motor tyres and tubes, metallic containers, chaff cutters and wheat thrashers, bicycles, refrigerators, air-conditioners, electricity generators and electric batteries etc.

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