Recent developments in the external sector of the country appear to be largely positive. Exports during the month of February, 2011 have surged by 42.07 percent to reach dollar 2.158 billion as against dollar 1.519 billion in the same month last year.
Imports at dollar 3.053 billion also recorded a growth rate of 21.88 percent as compared to dollar 2.505 billion in February, 2010 but as the increase in imports was much lower than in exports, trade deficit of the country shrank by 9.23 percent in February, 2011 over the same month last year. However, trade deficit during the year so far (July-February, 2011) was larger at dollar 10.265 billion as compared to dollar 9.517 billion in the corresponding period of FY10, showing a rise of 7.86 percent. During the first eight months of FY11, while exports rose by 24.64 percent to reach dollar 15.334 billion, imports went up by 17.32 percent to stand at dollar 25.599 billion.
Remittances sent home by overseas Pakistanis, another major component of the current account of the country, have also shown a remarkable improvement during the current year. The State Bank reported on 10th March that Pakistanis working abroad have sent 43 percent more remittances in February, 2011 as compared to the same month of last year. In value terms, these amounted to dollar 845.28 million during the month as compared to dollar 589.03 million received in February, 2010.
The level of inflows of home remittances during the year so far was also quite impressive. At dollar 6.963 billion during July-February, 2011, these were higher by 20.32 percent as compared to the same period last year. Country-wise, remittances from UAE, Saudi Arabia, USA, GCC countries (including Bahrain, Kuwait, Qatar and Oman), UK and EU countries amounted to dollar 1,627 million, dollar 1,563 million, dollar 1,298 million, dollar 820 million, dollar 771 million and dollar 220 million respectively while receipts from Norway, Switzerland, Australia, Canada, Japan and other countries were also higher at dollar 664 million as compared to dollar 551 million in the same month last year.
With the latest developments in the external sector, particularly in view of a very robust growth in exports and home remittances, economic managers would be hoping for a much better outcome in the current account of the country. Already, signs for a substantial improvement are quite visible. Targeted at 2.8 percent of GDP during the current fiscal, current account deficit of the country was just 0.1 percent of GDP during July-January, 2011 and if the present trend continues, overall deficit during 2010-11 could be much lower than the ceiling. This would undoubtedly be a matter of great satisfaction as the improvement would be registered despite acute shortage of energy and devastation of floods which were expected to hit the economy hard and reduce the level of exportable surpluses by a substantial margin.
The positive effects of a healthier current account balance of the country could be seen in the form of relative stability in the exchange rate of the rupee, a comfortable level of foreign exchange reserves and an uninterrupted flow of imports to supplement the availability of consumer goods in the country and provide the necessary raw materials and capital goods for industry. Needless to add that the requirements for foreign borrowings will also be reduced and the authorities at the helm could negotiate with the Fund staff more confidently due to an indigenous improvement in the current account.
However, while the latest trends in the foreign sector are welcome, these are driven mostly by exogenous factors. For instance, increase in commodity prices, especially cotton prices in the international market, are largely responsible for a surge in exports. Rice exports have also jumped due partly to price effect during the year to increase the level of exports. So far as a steep increase in home remittances during February, 2011 is concerned, this may be due to present uncertain security situation in most of the countries where our workers are based and their desire to remit their hard-earned money to the parent country as soon as possible. If this was the case, the level of remittances may taper off in the coming months.
Also, the oil import bill may shoot up due to further spike in the international prices of oil because of uncertain conditions in some of the oil exporting countries. All of this suggests that relevant authorities of the country need to monitor the situation carefully, avoid over-optimism and be prepared to undertake appropriate measures if there is a reversal of the present positive trend in the external sector. Especially important in this context would be to continue the policy of containing import demand through a tight monetary and fiscal stance and by maintaining market-determined exchange rate of the rupee.