External accounts in the balance

The ISI chief Lt Gen Ahmed Shuja Pashas short and abrupt visit to US in pursuit of reviving US-Pak strategic ties, following the USs latest attempt to block $800 million military proceeds to Pakistan, exposes the countrys relatively weak position.
With the economy facing intractable problems, the countrys balance of payments is suffering due to the growing rift between Pakistan and its major strategic ally, thus amplifying the lingering risks of reversal in Pakistans external sector performance.
The cut in the scheduled proceeds poses no immediate threat to the country. But, taking cue from past experiences, any further hiccups of this nature could follow through to the foreign reserve account by stoking fears of capital flight.
The balance of payment crisis has been blamed for almost bringing down the whole economy in 1998 and 2008. The countrys foreign reserve level fell close to $6 billion in October 2008 from a record high of $16.5 billion in October 2007.
Even though the country has made progress in accumulating dollar reserves in the past few years, the real danger lies in the current mix of dollar reserve portfolio since out of a total of $18 billion in reserves, nearly $9 billion are owed to the IMF and more than $3 billion are deposited with commercial banks. This means that the country is essentially left with a small amount to cover its import bill.
Besides, the real ticking bomb is declining aid and investments from abroad, as FDI shrunk to one-fourth of FY08 levels in the last fiscal year
The growth in export proceeds has also provided breathing space to the overall balance of payments, but its overall positive impact on the countrys fiscal position to some extent has been eroded by the growth in the import bill. As both foreign receipts and payments are commodity price-centric, which more or less move in tandem, the growth in prices of oil, steel and coal imports have mitigated the positive impact of the surge in prices of major exporting commodities, such as cotton and rice.
With domestic borrowing at the center of the governments financing these days, the countrys current account balance doesn reflect the countrys fiscal deficit. But, a higher level of domestic borrowing is having knock-on effects in the domestic economy.
Therefore, the only silver lining at the moment are remittances, which are a curios case. The record inflow of workers remittances has helped foreign exchange reserves grow steadily.
Researchers have tried to link remittances growth to the whitening of black money, interest rate differential factor and incentives extended by SBP. However, in the absence of good statistics on remittances and migration, economists and policy makers question its sustainability since a parallel informal transaction channel "Hundi" still facilitates quite a substantial portion of domestic inflows. The country can not wager its fiscal future on remittances.
With the IMF at the tail-end of rescue avenues, any further knock on the doors of the funding agency means welcoming tough austerity measures. The country is between a rock and a hard place. This raises the need to keep the current funding doors open till the other earning avenues become bankable.