SBP warns against delay in release of external flows

The State Bank of Pakistan has warned that if external flows are not released timely, there is a risk of further substantial government borrowings from the banking system, making liquidity management challenging. According the SBP monetary policy announced on Saturday, the receipts are some Rs 182 billion less than the target which has compelled government to further enhance its reliance on domestic borrowing.
Only Rs 48 billion have been received from external sources to finance the budget during first half of current fiscal year 2010-2011 (H1-FY11) against the budget estimate of Rs 230 billion for the year. "If these external flows are not released in a timely manner, there is a risk of further substantial government borrowings from the banking system, which will make liquidity management more challenging", the SBP warned.
The government has already borrowed substantial amounts, Rs 329 billion during 1st July to 12th March, FY11, through various instruments, increasingly in the 3-month Treasury Bills. The incremental requirements of the government for Q4-FY11 and a debt plan that focuses on long-term borrowings are awaiting announcement, it said.
According to SBP there is a growing uncertainty in the global economic environment also and popular uprisings in the Middle East and North Africa (MENA) region and unprecedented damage to the Japanese economy because of an historic earthquake and tsunami have shaken the global economy once again, which has yet to fully recover from the repercussions of the financial and economic crises of advanced economies.
"One consequence of these uncertain times has been high international commodity prices, especially of oil. So far, the terms of trade shock has been favourable for Pakistan's economy," it informed. More than 90 percent of the incremental increase in export earnings during July - February, FY11 over the corresponding period of last year has been due to high international prices of Pakistan's exports. The contribution of high import prices, particularly of oil, to the import bill has been relatively low, but is substantial and rising.
According to SBP turmoil in the MENA region may also influence the flow of remittances to Pakistan. However, assuming that the inflow of remittances continue its current trend for the remaining months of FY11, there are no immediate risks to the external current account balance.
The financial account inflows such as foreign direct and portfolio investments, on the other hand, have remained fairly modest during July-February, FY11; almost half the level of inflows seen in the corresponding period of last year, which was also small compared to historical levels. The overall balance of payments position appears to be strong at the moment with a gradual build-up of foreign exchange reserves and a stable foreign exchange market. However, given the uncertainty with respect to foreign inflows, the developments in the external sector will need to be monitored closely in the coming months, it said.