KARACHI (June 01 2008): A depletion in foreign exchange reserves’ by $4.8 billion has eroded the reserves adequacy from 30.6 to 18.1 weeks of import coverage. Since food and petroleum imports constitute more than half of the rise in imports, there is a limited scope for import compression in the short run, says the State Bank of Pakistan.
The Third Quarterly Report for FY08, issued on Saturday, by SBP, says: “it is likely that the country would need to raise imports to strengthen the infrastructure, particularly of power generation. Thus, policy focus needs to remain on addressing structural impediments to export growth in medium to long term.”
The report points out: “Subsidies do not incentives efficiency, raise fiscal costs and often lead to “gaming” to maximise rent seeking rather than increase productivity. Therefore, policies must instead focus on structural reforms to reduce cost of doing business, ensure efficient, provision of key inputs (water, power etc) improvements of logistic chains, etc.”
Besides structural reforms, says SBP, significant gains in foreign exchange earnings may be achieved by boosting services exports such as IT services and tourism and focusing on increasing remittances by benefiting from labour market opportunities in East Asian economies and the Middle East. Productivity gains to be accrued from skilled labour will have spillover effects in attracting FDI, enhancing workers’ remittances as well as increasing of goods and services, the report added.
EXCHANGE RATE: After remaining stable for more than four years, Pak rupee lost significant value against the dollar depreciating 13.4 percent during July 21st and May 2008. Most of the depreciation was post November 2007 due to capital flight on account of political unrest, trade related outflows and speculative activities, said SBP.
As against, the dollar, says SBP, rupee also depreciated against other major currencies. It lost 25.4 percent against the yen, 24 percent against the euro and 10.4 percent against the British pound.
Despite consistent rise in inflationary pressures as evident in 8 percent rise in relative price index (RPI), real effective exchange rate index depreciated by 3.2 percent during July-end March 2008. In nominal terms, the depreciation is 10.3 percent against major competing currencies during the period.
The SBP analysis shows that unlike previous years (FY03-FY06) when extraordinary import growth was mainly driven by demand pressures emanating from capacity expansion, the import growth in the current year was contributed by both high prices and demand factors, with former having a more greater role. The price rise in petroleum group imports was 70.3 percent while in food imports it was 86.2 percent. Adjusting for rise in these two groups, the current account deficit shows a sizeable decline during the period under review.
The widening trade deficit suggests a need for import curtailment, however, given more than 50 percent rise in imports is originating from food and petroleum imports, this strategy clearly has its limitations, leaving little option but to address structural problems to boost export earnings, emphasises the SBP.
Source: Business Recorder,