USAID Trade Project Trade Bulletin October to December 2012

The economy continued to experience high inflation, widening macroeconomic imbalances, and falling reserves due to increased fiscal debts. Gross Domestic Product growth is expected to decrease by 50 basis points from 3.70% in 2012 to 3.20% in 2013. Inflation, or Consumer Price Index, decreased from 10.30% in FY12 Q2 to 7.50% in FY13 Q2. The Current Account deficit decreased in FY13 Q2 to 1.33% of GDP from 1.73% in FY12 Q2. The Trade Account deficit is USD $3.94 billion for FY13 Q2 compared to USD $3.74 billion in FY12 Q2. Foreign exchange reserves amounted to USD $13.91 billion down from USD $16.94 in FY12 Q2. The top 10 export destinations collectively accounted for close to 62% in FY13 Q2 compared to 61% in FY12 Q2 of the country's total exports, highlighting Pakistan's undiversified export portfolio. Exports, by value, increased for cement, sugar, cotton yarn, ready-made garments, and towels, while exports for raw cotton, knitwear, footwear, basmati rice, and plastics declined by value. Import commodities that increased are petroleum products, telecom products, raw cotton, tea, fertilizers, and iron and steel, while a decrease was seen in fertilizer manufactured, palm oil, pulses, plastic materials, and road motor vehicles. Pakistan's economy continues to remain vulnerable across macroeconomic indicators like high inflation, energy shortages, and declining foreign exchange reserves, augmented by political instability and a variable security environment. The International Monetary Fund (IMF) projected Gross Domestic Product (GDP) growth for FY13 to decrease to 3.20% from 3.70% in FY13, stating energy constraints, variable security, and fiscal imbalances as the factors for the downgraded outlook. Foreign Direct Investment (FDI) increased by 64.42% in FY13 Q2, but it is not indicative of a trend, as demonstrated in the data. Investments were made in the oil and gas exploration sector, followed by power, information technology, and the transport sectors. The Philippines, United Arab Emirates (UAE), Italy, Hong Kong, and Switzerland were the top five FDI contributors. Although foreign exchange reserves were lower at USD $13.905 billion from USD $16.490 billion as compared to the same period last year, high remittances and the release of the US Coalition Support Fund in the end of December helped support the country's foreign exchange reserves. The value of the Pakistani Rupee (PKR) continues to weaken against the US dollar. According to the State Bank of Pakistan (SBP), the average month-end interbank floating rate reached a record high of PKR 97.19 against USD $1.00 in December 2012. The exchange rate for the same period last year was PKR 89.34 to USD $1.008. The trade deficit and ongoing debt payments to the IMF, Asian Development Bank, World Bank, and other lending agencies continue to apply pressure on the Pakistani Rupee. The currency's future stability remains uncertain as a result of continued volatility against the more stable US dollar. Remittances in FY13 Q2 were recorded at USD $3.52 billion, rising by 16.15% compared to FY12 Q2. The top three origins of remittance transfers to Pakistan were Saudi Arabia, the UAE, and the US, and account for 47.32% of the total remittance. The Ministry of Finance of the Government of Pakistan states that the remittances in the current fiscal year will hit a record high of USD $14 million. The Pakistan Remittances Initiative (PRI) is a joint effort between the SBP, Ministry of Overseas Pakistanis, and Ministry of Finance and helps the efficient flow of transfers. Two challenges that Pakistan's economy currently faces are managing the balance of payment position and containing inflation. Despite a current account surplus of USD $250 million, net outflows and Pakistan's repayment of part of its IMF debt obligations, to the sum of USD $1.4 billion, foreign exchange reserves, which declined to USD $8.7 billion this quarter, will continue to be strained. Similarly, the balance of payments in the medium term will sustain as a result of low financial inflows. In the remaining five months, USD $1.6 billion of IMF loan repayments is expected to further exacerbate the situation. These factors combined with muted investor confidence due to the variable security environment and the economy's structural instability may not support the return of a healthy economy in the short to medium term.