World Bank highlighted the risks associated with Pakistan’s economy in its recent South Asia Economic Focus and revealed that the country needs at least $31 billion in the current fiscal year to meet its foreign financial obligation.
World Bank says that Pakistan’s external gross financing needs currently stand at 9% of GDP, which is about $31 billion. Pakistan’s economy crossed the $300 billion GDP mark in May and currently stands at about $305 billion.
Pakistan’s foreign exchange reserves with the State Bank of Pakistan (SBP) currently stand at $18.3 billion only which is not even half of what we need to cover our external gross financing. However, there is a conflict in the external financing figures calculated by the World Bank which has factored in foreign portfolio investments as well.
While calculating the required external financing, foreign portfolio investment is not taken into account and only current account deficit and external debt payments are included. Foreign portfolio investment currently stands at $13.8 billion or 4% of the GDP.
The $13.8 billion figure is too high, that according to former Finance Minister Dr. Hafiz Pasha, all the leading economists of the country share the opinion that Pakistan’s external financing needs will be about $20 billion during the year. However, the $20 billion figure is more than the foreign exchange reserves of the country and thus Pakistan will need to either boost up its reserves or cut down its external financing in order to maintain a balance between reserves and external financing.
World Bank’s Chief Economist, Martin Rama said that the inclusion of foreign portfolio investment was only to show the problem Pakistan is in as compared to the previous fiscal year. In the last year, Pakistan’s foreign exchange reserves covered the external financing needs which also included the foreign portfolio investment, which is not the case today.
World Bank’s report did not show a positive picture for Pakistan in the coming months as it said that the external sector would continue to go down in the coming months as well. In order to avoid this deterioration of the external sector, the government of Pakistan needs to come up with policies in which exports can be boosted and imports can be curtailed. This will result in a reduced current account deficit as well.
The Government of Pakistan last week announced new measures through which it plans to boost the exports. The Economic Coordination Committee approved the export package through which 50% of the incentive will be given to exporters of textile and non-textile goods without the condition of showing a 10% increase in shipments. The remaining 50% will be given to exporters who show a 50% increase in shipments as compared to same periods last year.
The flow of smooth remittances also needs to be ensured by the government of Pakistan which have shown an increase in the month of August 2017 as compared to July 2017. During August 2017, remittances totaled $1.9 billion up from $1.7 billion in August 2016.