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In continuation to 'external scorecard in red' published on August 30, 2016, latest snapshot is presented here. The idea is to reveal what is behind the high foreign exchange growth in Pakistan. It grew from $11 billion (3.3 months of imports) in June 2013 to $23.2 billion (6.9 months of imports) by December 2016. Hence, in the PMLN's rule so far, the foreign reserves increased by $12.2 billion; such a growth is unprecedented in Pakistan and Dar pegs his economic management success to this very factor.

But the growth has come with a cost. The external debt of Pakistan increased by $13.2 billion in the same time, to $74.1 billion. Although in terms of GDP, the debt declined from 26.3 percent in June 2013 to 23.2 percent in Dec 2016. Adjusting for external debt, the reserves are down by $900 million in the forty two months of Dar's sound economic (read: accounting) management.

From June 13 to June 16; the reserve pile up of $12.1 billion was exactly matched by the uptick in country's foreign debt. And the situation worsened in the last six months, as during Jul-Dec16 reserves were up by just $100 million, while the external debt grew by $1 billion.

No wonder, falling exports and saturating remittances amid nonstop pick up in imports, especially machinery, are taking the toll. The current account deficit in July-Jan jumped up to $4.7 billion (2.5% of GDP) while there is nothing much of non-debt related flows in financial and capital account, as the FDI remained low.

The government is trying to fix the slipping CAD with stop gap solutions, such as fiscal cash incentives to key exporting sectors, while imports are attempted to be curbed by enhancing cash margins on an array of products. The impact of cash incentives on exports, initiated in Jan 2017, is yet to translate into numbers and it may inch up exports. But by no means can it let exports grow with the pace of economic growth.

The worry is that Pakistan's coefficient to imports to total production is at 0.34, while in case of exports it is at 0.24. This implies that with an incremental one percent increase in production, imports would increase by 0.34 percent and exports by 0.24 percent. The ratio are based on census of manufacturing industries 2005-6. The PBS is in the process of conducting latest censes and this may alter these coefficients; but given the way imports have grown over the period of time, chances are that the ratio would have deteriorated by now.

The trade deficit has worsened since the last census of manufacturing as nominal economy grew by 2.7 times from $105 billion (FY04) to $284 billion (FY16) while the exports have less than doubled from $12.3 billion (12.7% of GDP) ) to $22 billion (7.8% of GDP). Imports on the other hand, trebled from $13.6 billion (13.9% of GDP) to $40.4 billion (14.2% of GDP). The growth pattern implies that after the last manufacturing census, imports have grown higher than the pace of economy while the exports have receded.

In the process, trade deficit is primarily financed by remittances to not let the CAD go out of bound. Remittances are saturating. If the economy grows from $284 billion today to $776 billion by 2030 as projected by PwC, with worsening coefficient of production to exports and heightening coefficient to imports, the trade balance might go out of proportion.

That is the biggest concern on the external account and CPEC is just a fraction of it. There is a dire need to look for new avenues of non-debt based foreign exchange earnings in the medium to long term. But nothing from the policy front can be seen, other than the hollow target of $150 billion of exports by 2025.

The onus of any growth in foreign reserves falls on external borrowing - be it public or private. That is the story of this government tenor so far, as it takes the lions share of incremental debt - public debt increased by $11.1 billion since June 2013 to $64.5 billion today.

Such a trend is simply not sustainable, especially when the debt is meant to finance fiscal deficit. But not all the debt is for fiscal support as some increase is in the IMF debt, for balance of payment support.

The way things are proceeding; experts won't be surprised to see external debt to cross $100 billion in a few years if the economy continues to grow around 5 percent. The point is either to not let the economy to grow at higher pace or bite the bullet of higher external obligations.

It's a tough task as high economic growth is imperative for job creation of the emerging youth while the economy is not equipped in dealing with higher growth trajectory for long, given external vulnerabilities. Could this lead to a debt trap? It is for the economists and policymakers to ponder upon.

Copyright Business Recorder, 2017

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