''July-November FY12 reveals external account''s vulnerability''

Pakistan''s external account is under extreme pressure and the State Bank of Pakistan in its first quarterly report FY12 has testified that the deterioration in current and financial accounts poses a stiff challenge to the remainder of this fiscal year. The external account remained under immense pressure as it posted a deficit of $1.7 billion during July-November FY12, as against a surplus of $100 million in the corresponding period last year.
SBP seems to be surprised by both the "timing" and "magnitude" of the current account deterioration. September came as the real shocker as larger than expected surge in trade deficit coincided with a slide in current transfers, leading to a deficit of over a billion dollar in September alone.
The report also highlights the vulnerability concerns over Pakistan''s external account, as the current account deficit had to be financed through reserves, unlike the past when it was financed through surplus in capital and financial account.
The financing through reserves, as expected put pressure on the exchange rate as a genuine shortage of hard currency due to a large deficit resulted in a weakening rupee. Moreover, Pakistan''s exit from the IMF programme and growing tensions with the US played their part in augmenting speculation, putting further pressure on the exchange rate.
"Pakistan must make all out efforts to ensure the resumption of financial inflows," urges SBP; even if it means focusing on non-traditional bilateral financing. SBP has singled out the Currency Swap Arrangements, especially with China, as an "encouraging development", which should ease some pressure off the exchange rate.
The central bank has shown greater conkers over the trade deficit which has swelled to new highs as it widened by a further 36.7 percent to $9.1 billion during July-November FY12, as against $6.6 billion, in the corresponding period last year.
The slowdown in textile exports has been singled out as the biggest factor in subdued exports growth which stayed at 7.6 percent during the period under review, as against 15.8 percent in the same period last year.
The fall in textile exports is alarming especially in the months of October and November, as both the value and quantity of exports fell. SBP fears that the worse is yet to come as it sees the prospects are not rosy with the prevailing energy crisis at home and the likely recession in the Eurozone, which is likely to hamper textile exports.
Pakistan continues to record rather unwanted growth in imports which swelled by 18.5 percent during the period under review. The highest increase of 46.8 percent was recorded in petroleum product imports, which saw a rise both in terms of quantity imported and price. The higher than usual fertiliser imports also played augmented the import bill, as the energy crisis made life tough for local producers.
There are lessons to be learnt from the worsening external account, which is mainly a result of widening trade deficit. It is pertinent to note that the items disturbing the trade balance were all affected by the domestic energy crisis. Things could have been much better, had the focus been on prioritising natural gas to industries such as fertiliser and textile instead of domestic and transport, as the resultant fall in production worsened the trade account.