Figure 5.1: SBP Liquid FX ReservesPakistan (CMPak - Zong) for network up-gradation to provide its customers 3G/4G data services. 8 During Jul-Mar FY15, there was an outflow of US$

5 External Sector

5.1 Overview

Pakistan’s external sector

posted a marked improvement

in the first 9 months of FY15

(Figure 5.1). The SBP’s FX

reserves have reached US$ 11.6

billion by end-March, which

can finance around 3 months of

the country’s import bill. The

net international reserves (NIR)

have also firmed up, as SBP

continued to make spot

purchases from the interbank. More recently, the international rating agencies

have endorsed an overall stability in Pakistan’s economy, foreseeing much reduced

external sector risks than before.1

This improvement in the

country’s external account was

driven primarily by higher

inflows from the coalition

support fund (CSF); a slump in

global oil prices; IMF support;

and successful mobilization of

external funding by the

government (via Sukuk

issuance and divestures)

(Figure 5.1). In addition,

strong growth in worker

remittances has continued to

lend support to the current

account.

That said, the overall BoP performance could have been much more promising, if

it were not for a few pull-down factors. At first, the decline in overall imports is

much smaller than what the decline in oil prices had envisaged; non-oil imports

have surged at a much faster rate (Section 5.5). This basically reflects Pakistan’s

1 Moody’s and S&P have improved Pakistan’s outlook from ‘stable’ to ‘positive’ on 25th March and

5th May, respectively. This was primarily on account of a stronger external liquidity position.

Table 5.1: Selected External Sector Indicators

million US$

Q3 Jul-Mar

FY14 FY15 FY14 FY15

SBP reserves (change) 1,887 1,102 642 2,518

C/A balance -689 778 -2,692 -1,639

excl. CSF -1,042 61 -3,367 -3,091

Trade balance -3,830 -3,096 -12,480 -12,923

FDI in Pakistan (net) 295 187 741 711

IMF loans net 16 301 -913 1,029

Worker's Remittances 3,794 4,347 11,586 13,329

Source: State Bank of Pakistan

8

9

10

11

12

13

30

-Ju

n-1

4

29

-Ju

l-1

4

27

-Au

g-1

4

25

-Sep

-14

24

-Oct-

14

22

-No

v-1

4

21

-Dec-1

4

19

-Jan

-15

17

-Feb

-15

18

-Mar-

15

16

-Ap

r-1

5

Figure 5.1: SBP Liquid FX Reserves

EFF 556 mlnEFF 4th &5th

1.1 bln

CSF 364 mln

CSF 371 mln

Sukuks 1 bln

EFF 6th 498 mln

HBL divesture 764 mln

CSF 717 mln

bil

lio

n U

S$


The State of Pakistan’s Economy

50

growing dependence on imported raw materials and capital goods, to expand the

real sector activity. Secondly, exports have declined. Although the recession in

the EU is not directly hurting Pakistan’s exports – as our products are cutting into

competitors’ shares,2 the indirect impact is strong: our competitors (especially

China) are major buyers of our low value-added products, and moderation in their

demand is hurting Pakistan’s exports (Section 5.5).

To a large extent therefore, Pakistan’s structural deficit is still persisting. To

reduce this, measures should be taken against the inflow of unnecessary/

unproductive imports (e.g., packaged food; mobile phones; other consumer goods)

into the country, whereas import substitution may also be thought along to reduce

import dependence on some of the industrial inputs (like low-tech machinery and

chemicals) (Section 5.6). For export expansion, it has become critical to design an

industrial policy that clearly spells out the country’s strategic objectives. Areas

that need special attention include the country’s resource base; productivity and

efficiency; energy supplies; and effective supply chains.

To achieve this, Pakistan should capitalize on the available FX comfort it has

earned over the last year. More specifically, with IFI support in play (along with a

stable outlook for oil prices), Pakistan is not likely to face any serious BoP concern

in the near future. However, what is important to realize is that the longer the

government takes to fix the supply-side constraints, more difficult it would

become to narrow the future FX gap – the burden of external debt servicing is

increasing in the interim period.

Therefore, in addition to reducing structural deficit, financing must also shift away

to non-debt creating inflows, i.e., foreign investments. Not only would this bring

the needed FX into the country, but also strengthen the country’s debt servicing

capacity in the future. Pakistan’s macroeconomic conditions have not been

conducive for FDI in the past few years, but some optimism has crept in lately,

with positive assessments coming from the IMF as well as global rating agencies.

China-Pakistan Economic Corridor Program is also being considered as a game

changer in reviving investment in the country. And above all, military operation in

tribal areas and Karachi should contribute in reducing the investors’ security

concerns.

5.2 Current account

The current account deficit posted a sharp reduction in Jul-Mar FY15 (see Table

5.2). This improvement came primarily in the third quarter, in which a surplus of

US$ 778 million was recorded.

2 Pakistan’s exports to the EU-28 have increased by 6.1 percent during Jul-Feb FY15. Furthermore,

Pakistan’s share in the EU-28’s total imports has also increased during the same period (Section 5.6).

Third Quarterly Report for FY15

51

Three factors mainly explain

the Q3 surplus: (i) an inflow of

US$ 717 million in February

2015 under the coalition

support fund (CSF); (ii) an

increase of 15 percent YoY in

worker remittances during Q3-

FY15; and (iii) a sharp

reduction in the oil import bill,

which narrowed the trade

deficit by 19.2 percent YoY

during Q3-FY15. In the past

decade, this is only the second

time when the current account

has posted a surplus in any

quarter; last one being Q4-FY11, when the record-high cotton prices had inflated

our textile exports (Figure 5.2).

The reduction in trade deficit during Q3-FY15 was driven primarily by a sharp

decline in the country’s import bill, which more than offset a weaker export

performance. Within imports, a slump in global oil prices helped reduce the

petroleum bill, however, growth in non-petroleum imports remained stronger than

last year.3 The demand for steel and machinery remained particularly strong due

3 According to Customs data, non-oil imports have increased by 13.5 percent YoY during Jul-Mar

FY15, compared to only 1.9 percent growth in Jul-Mar FY14. On average, non-oil imports had

grown by only 3.8 percent in the last five years.

-5

-4

-3

-2

-1

0

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

P

FY 06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

bil

lio

n U

S$

Figure 5.2: Quarter-wise Current Account Deficit (excl. coalitionsupport fund)


Table 5.2: Composition of Current Account

million US$

Q3 Jul-Mar

FY14 FY15 FY14 FY15

Current account balance -689 778 -2,692 -1,639

I. Trade balance -3,830 -3,096 -12,480 -12,923

Exports 6,279 5,933 18,746 18,120

Imports 10,109 9029 31,226 31,043

II. Services balance -621 -124 -2129 -1,428

CSF 353 717 675 1452

III. Primary income -859 -840 -2,865 -3,132

Interest payments 190 210 634 783

IV. Secondary income 4,621 4,838 14782 15,844

Worker remittances 3,794 4,347 11,586 13,329



52

to vibrancy in domestic construction and automobile sectors. As for the exports,

the major irritant was the weaker demand of cotton-based inputs from China and

Bangladesh, whose value-added exports have been losing steam in the previous

few months. Pakistan also struggled in the global basmati market as Indian

varieties became more competitive in the UAE market (Section 5.5). In addition,

the decline in commodity prices also weighed on Pakistan’s exports (especially

naphtha, cotton yarn and non-basmati rice).

In the services account, the swing factor was the inflow of CSF during the quarter.

The Q3 inflow of $717 million, together with Q1 inflows of US$ 735 million,

helped the services account post a much reduced deficit in Jul-Mar FY15

compared to the same period last year.4 Other components of the services account

have also shown some improvement: the deficit in passenger and freight related

transport remained lower than last year. While the inclusion of new aircrafts in the

PIA fleet may have diverted some local passengers away from foreign carriers,

freight payments benefited

from reduced fuel prices.

Worker remittances posted a

15 percent growth during Jul-

Mar FY15, against a targeted

annual growth of 5.7 percent

set by the government.5 To

put this in perspective,

remittances made up for

nearly 43 percent of the

country’s import bill; and 94

percent of deficit in the goods

and services accounts (Figure

5.3).

The continuous strength in

worker remittances has been driven by multiple factors, including: (i) a sharp rise

in the number of Pakistanis going abroad, especially to the GCC countries;6 (ii)

more workers using formal channels to send money to their families in Pakistan,

due to measures taken by domestic banks under the Pakistan Remittance Initiative

(PRI); (iii) introduction of innovative products and expansion in market coverage

4 Pakistan had received CSF inflows of US$ 371 million in August, and US$ 364 million in

September 2014. 5 In the Annual Plan for 2014-15, the government has set the target of US$ 16.7 billion against the

actual remittances of US$ 15.8 billion last year. 6 According to the Bureau of Emigration and Overseas Employment, 752,466 Pakistanis went abroad

to earn their livings in 2014, compared to 622,714 people in 2013.

10

15

20

25

30

35

40

45

0

2

4

6

8

10

12

14

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

per

cen

t

bil

ion

US

$

Worker remittances % of Imports -rhs

Figure 5.3: Worker Remmitances (Jul-Mar)



53

by domestic banks, to facilitate

money transfers; and (iv) a

crackdown on informal money

transfers, and further tightening

up of anti-money laundering

laws in the country.

5.3 Capital and financial

account

Another spell of dull activity

was witnessed in the country’s

capital and financial accounts

during Q3-FY15. Both FDI

and portfolio investments

remained lower than last year,

whereas most of the committed

FX loan support has not been

received as yet.

Except for Chinese investment

in the country’s telecom,

renewable energy and

motorcycle industry, there

were no major foreign

investments during the year.7

Overall FDI inflows (net)

during Jul-Mar FY15 have

actually declined compared to

last year; more importantly,

this amount is much smaller

than the repatriation of

profits/dividends on the existing FDI.8

Sentiments were not strong for portfolio investments either.9 Analysts believe that

the 15 percent drop in the KSE-100 index during Q3-FY15, was largely driven by

foreign selling (see Figure 5.4). However, when political tensions in the Gulf

eased somewhat in April, investment activity revived at local bourses. This

7 China Mobile Company injected US$ 168 million in its subsidiary in Pakistan, China Mobile

Pakistan (CMPak - Zong) for network up-gradation to provide its customers 3G/4G data services. 8 During Jul-Mar FY15, there was an outflow of US$ 2.2 billion as repatriation on FDI in Pakistan. 9 An outflow of US$ 106 million in portfolio investment was recorded only in March 2015.

Table 5.3: Capital and Financial Account

million US$

Q3 Jul-Mar

FY14 FY15 FY14 FY15

Capital account 1,603 45 1,766 314

Financial account 576 885 -1,568 -1,117

1. FDI in Pakistan 295 186 741 711

2. Portfolio investment 20 -72 125 1,115

Sukuk /Euro

bonds - - - 1,000

3. Loans (excl. IMF) 32 -83 5 398

Disbursements 670 595 2,011 2,546

Amortization 638 512 2,006 2,148


(5)

(3)

(2)

0

2

3

5

04

/07

/2014

25

/07

/2014

15

/08

/2014

05

/09

/2014

26

/09

/2014

17

/10

/2014

07

/11

/2014

28

/11

/2014

19

/12

/2014

09

/01

/2015

30

/01

/2015

20

/02

/2015

13

/03

/2015

03

/04

/2015

24

/04

/2015

15

/05

/2015

bil

lio

n r

up

ees

Figure 5.4: Net Purchase (+)/ Sale (-) of Securities in SCRA*

*This data does not include lumpy amount pertaining to HBL divesture. Source: State Bank of Pakistan


54

revival was further supported by HBL divesture during the month (the FX

component was US$ 764 million). Encouragingly, there are more privatization

related transactions in the pipeline that are likely to attract foreign investment in

coming months (Table 5.4).10

Net inflow of FX loans into Pakistan increased during Jul-Mar FY15, mainly on

account of higher disbursements from international financial institutions (like US$

987 million from the IDB, and US$ 364 million from the ADB). However in Q3-

FY15, repayments exceeded the total disbursements (see Table 5.2), as a number

of budgeted inflows did not materialize. For instance, US$ 3.0 billion from ADB,

IDA and China, are still awaited in the remaining part of the year.11

The resumption of FX loans from the IFIs is indeed a good news for Pakistan’s

balance of payments. However, it should also be kept in mind that these inflows

are effectively generating servicing burden in the future. Already Pakistan’s

external debt servicing has reached US$ 4.1 billion during Jul-Mar (provisional),

which is more than 23 percent of the country’s exports. This basically calls for

improving Pakistan’s current account, especially by expanding exports, to increase

repayment capacity in the future.

5.4 Exchange Rate

The PKR depreciated by 3.1 percent vis-à-vis US Dollar in Jul-Mar FY15. This

depreciation partly reflects SBP’s FX purchases from the interbank; otherwise,

sentiments about the PKR remained positive due to a comfortable balance of

10 Although the government has appointed financial advisors for privatization of most Discos,

Pakistan Steel, PIA, and National Power Construction Corporation, the privatization process is

behind the schedule. 11 According to the Economic Affairs Division, budget estimate for foreign economic assistance from

China stood at US$ 1.5 billion for FY15, of which US$ 565 million has been disbursed during Jul-

Mar. Similarly, against the full-year estimates of US$ 1.1 and 1.7 billion, the government has

received US$364 and US$209 million respectively from ADB and IDA in Jul-Mar FY15.

Table 5.4: Timeline for the Privatization of PSEs

PSEs Transaction Timeline

National Power Construction Corp. 88 percent sell-out of strategic asset End-Jun 2015

Mari Petroleum Ltd. Sale of 18.39 percent of GoP shares End-Sep 2015

Pak Arab Refinery Ltd. (PARCO) Sale of 10-15 percent company shares End-Dec 2015

Northern Power Generation Company Ltd. Strategic & Asset Sale End-Dec 2015

Pakistan Steel Mills (PSM) Strategic & Asset Sale End-Dec 2015

Kot Addu Power Company (KAPCO) Sale of 40.25 percent of GoP shares End-Dec 2015

Pakistan International Airlines (PIA) Sale of 26 percent of GoP shares End-Dec 2015

Source: IMF Country Report 15/162


55

payments. In real terms, however, the PKR has appreciated during the same

period.12,13

As shown in Figure 5.5, there were few episodes of REER appreciation over the

past decade, however, most of these were driven by a rise in the relative price

index (RPI); in nominal terms, the PKR had been weakening in these episodes.

However, relative prices have a little role to play in the recent appreciation of the

REER.14

as the NEER appreciated considerably during Jul-Mar FY15. This

appreciation can be traced to the prevailing turmoil in global currency market,

which has caused a sharp appreciation of the US Dollar vis-à-vis other hard

currencies (Figure 5.6 and 5.7).

More specifically, after years of co-ordinated policies to fight global economic

slowdown, the monetary policies in the advanced economies started diverging

significantly with the start of 2014. While the Fed began to unwind its asset

purchase program, the ECB and Bank of Japan started injecting huge volume of

liquidity into their banking systems.

More specifically, the Fed’s tapering of its Quantitative Easing program (QE) from

January 2014 onwards, was perceived as a positive signal about the US economy.

12 The nominal effective exchange rate represents the value of a country's currency relative to all

major currencies within a pool. It is calculated as an index of bilateral exchange rates, weighted by

the share of each trading partner. The nominal effective exchange rate (NEER) is adjusted by the

ratio of domestic price to foreign prices, i.e., relative price index (RPI), to get the real effective

exchange rate (REER). 13 The REER index has increased by 7.6 percent during Jul-Mar FY15. 14 In fact, the slowdown in RPI has stemmed from stable/strong PKR recently, which has been

instrumental in containing inflation expectation.

-25

-15

-5

5

15

25

Jan

-05

Jun

-05

No

v-0

5

Ap

r-0

6

Sep

-06

Feb

-07

Jul-

07

Dec

-07

May

-08

Oct

-08

Mar-

09

Au

g-0

9

Jan

-10

Jun

-10

No

v-1

0

Ap

r-1

1

Sep

-11

Feb

-12

Jul-

12

Dec-1

2

May

-13

Oct

-13

Mar-

14

Au

g-1

4

Jan

-15

NEER RPI REER

per

cen

t

Figure 5.5: Year-on-Year Changes in REER and its Components



56

Since the tapering schedule was followed strictly, confidence about the US

economy gained further strength. As a result, expectations of an increase in the

federal fund rates took hold, which created a massive inflow of capital into the US.

The US Dollar began to appreciate to reach an 11-year high against the basket of

hard currencies. Currencies of some emerging economies like Mexico, Singapore,

Malaysia and Indonesia, have also stooped against the US Dollar. The impact on

China, Thailand, India and Pakistan was relatively less.

In contrast to the US, the economic problems of the Euro zone are still around.

The ECB had to begin its own asset purchase program in 2014, which put

downward pressures on interest rates. As a result, FX capital started to move out,

and the Euro tumbled. The deepening of Greek crisis – expectations of a debt

default and possible exclusion of Greece from the common currency, turned the

sentiments further against the Euro. In overall terms, the Euro depreciated by 28.7

percent against the US Dollar, and 23.5 percent against the PKR during Jul-Mar

FY15. Since the Euro has a combined weight of 23.6 percent in Pakistan’s NEER

basket, its weakening has pushed up the overall NEER.

As we will see in Section 5.5, there is no credible evidence of a direct impact of

real PKR appreciation on Pakistan’s exports. Pakistan’s export to the EU – both in

terms of volumes and share – has actually increased in Jul-Mar FY15, despite a

significant appreciation of the PKR vis-à-vis Euro.15

This is mainly because it is

not only the PKR that has appreciated against the Euro; other currencies –

especially of our competitors – have also appreciated.16

More importantly, the

comparison of overall REER indices (computed by the JP Morgan) shows that the

appreciation in Indian Rupee, Chinese Yuan and Thai Baht was stronger than that

of Pakistan.17

15

As far as the decline in exports to the non-EU market is concerned, this can be explained by non-

price factors to a large extent. 16 For instance, since the beginning of this fiscal year, the Indian Rupee has appreciated by 19.8

percent against the Euro; the Chinese Yuan by 26.3 percent; and the Thai Baht by 25.7 percent. 17 The JP Morgan index of real effective exchange rate is computed for different advanced and

emerging market economies, to evaluate their competitiveness. According to this data, Pakistan’s

REER has posted an appreciation of 3.8 percent during Jul-Apr FY15, which is smaller in

comparison to 4.6 percent appreciation for India; 13.0 percent for China; and 8.2 percent for

Thailand (Source: Haver). The data for Bangladesh is not available.


57

0

10

20

30

40

Eu

ro

Au

stra

lia

Jap

an

Ca

na

da

Mex

ico

UK

Ma

lay

sia

Sw

itzerl

an

d

Ind

on

esi

a

Sin

ga

po

re

So

uth

Ko

rea

Ind

ia

Th

aila

nd

Ch

ina

Sa

ud

i Ara

bia

Pa

kis

tan

perc

en

t

Figure 5.6: Appreciation (+)/Depreciation (-)of USD vis-a-vis Currencies in the NEER Basket

Jul 2014 - Mar 2015

-10

0

10

20

30

Eu

ro (2

3.6

%)

Au

stra

lia

(1

.8%

)

Tu

rkey

(2

.3%

)

Ca

na

da (2

.2%

)

Jap

an

(7

.4%

)

UK

(5

.5%

)

Ma

lay

sia

(1

.7%

)

Sin

ga

po

re (2

.1%

)

So

uth

Ko

rea

(3

.3%

)

Ind

on

esi

a (1

.4%

)

Sw

itzerl

an

d (

1.5

%)

Ind

ia (2

.4%

)

Th

aila

nd

(2

.2%

)

Sa

ud

i Ara

bia

(1

.9%

)

US

A (

19

.5%

)

UA

E (

2.5

%)

Ch

ina

(1

4%

)

perc

en

t

Figure 5.7: Appreciation (+)/Depreciation (-)of PKR vis-a-vis Currencies in the NEER Basket

Jul 2014 - Mar 2015

Numbers in parenthesis on the X-axis, represent share of respective region in the NEERSource: State Bank of Pakistan


58

5.5 Trade Account18

Customs records show that

the trade deficit has

expanded by 14.9 percent

YoY during Jul-Mar FY15,

in contrast to a contraction

of 5.3 percent during the

same period last year. This

higher deficit was mainly

observed in the first two

quarters of FY15; in the

third quarter, the deficit

reduced substantially due to

a more pronounced decline

in imports (Table 5.5).

Exports

Exports declined by 6.0 percent YoY during Jul-Mar FY15, compared to an

increase seen last year. The

decline was broad-based, but

was more prominent in

jewelry, naphtha, cotton

fabrics and rice (Figure 5.8).

Restrictions on Gold Import

The decline in jewelry export

during Jul-Mar FY15 stemmed

mainly from the restrictions on

gold import by the

government. In fact, the

government had been

imposing periodical bans on

gold import throughout 2013

and 2014 to curb onward

18 This section is based on customs data reported by the PBS. We use this information because it

reports the value of exports and imports, when the physical movement of goods takes place. This

data set also has the advantage over payments record data for analysis purpose, since this carries

information on quantums and unit values. The information in this section does not tally with the

payments record data, which is reported in the balance of payments. To understand more difference

between the two data series, please see Annexure on data explanatory notes.

Table 5.5: Foreign Trade (Customs data)

Exports Imports Trade deficit

Value in billion US$

Q1-FY15 6.0 12.5 6.5

Q2-FY15 6.1 11.7 5.6

Q3-FY15 5.9 9.9 4.0

Jul-Mar FY15 17.9 34.0 16.1

Jul-Mar FY14 19.1 33.0 14.0

YoY growth in %

Q1-FY15 -10.4 11.6 44.4

Q2-FY15 2.3 11.2 22.8

Q3-FY15 -9.0 -13.3 -18.9

Jul-Mar FY15 -6.0 2.8 14.9

Jul-Mar FY14 5.9 0.8 -5.3

Source: Pakistan Bureau of Statistics

-400 -300 -200 -100 0 100 200

KnitwearReadymade garments

Tarpauline Leather footwear

TowelsCement

SugarLeather garments

BedwearRaw cotton

Plastic materialBasmati riceCotton yarn

Other chemicalsCotton fabrics

NapthaJewelry

million US$Source: Pakistan Bureau of Statistics

Figure 5.8: Major Exports Jul-Mar -FY15 (YoY change)


59

smuggling to India, and to reduce FX burden in the kerb market19

In April 2014,

the Ministry of Commerce laid out specific rules for gold import into the country,

which placed a cap on monthly quantum imports, along with restrictions on

volume per single transaction.20

Moreover, the purpose of import has also been

restricted to jewelry export, which is to be realized within 180 days of gold import.

It is important to note here that gold jewelry has a share of 86 percent in total

jewelry export of Pakistan, for which, Pakistan depends heavily on imported gold.

Naphtha export not feasible at current price

Despite an 18 percent growth in naphtha production, its exports declined sharply

during Jul-Mar FY15. This decline stemmed from weak global prices, which has

made it almost unfeasible to export. Presently, local refineries are looking into

options to process naphtha into in-demand petrol, and are making heavy

investments in establishing isomerization units that would convert naphtha into

petrol.

Weaker China and Bangladesh biting into Pakistan’s textile exports

China is the major buyer

of Pakistani cotton, and its

products (yarn and fabric).

Over the past couple of

years, China’s demand for

cotton products (especially

fabrics) has been

declining, as it is facing a

slowdown in the export of

its high value-added

products (the EU recession

is taking a toll on China’s

exports). Having said this,

it is important to note that

Pakistan’s share in the

Chinese market has

increased in FY15 (Figure

5.9). In case of cotton yarn, quantum exports remained almost at last year’s level,

but lower unit prices have pushed down the value of Pakistan’s exports.

19 For details, see SBP Third Quarterly Report for 2013-14. 20 Source SRO 328(I)/2014, Ministry of Commerce, Government of Pakistan.

6

9

12

15

18

0.5

1.0

1.5

2.0

2.5

Jan

-11

May

-11

Sep

-11

Jan

-12

May

-12

Sep

-12

Jan

-13

May

-13

Sep

-13

Jan

-14

May

-14

Sep

-14

per

cen

t

bil

lio

n U

S$

China's total imports Share of Pakistan - rhs

Figure 5.9: China's Total Import of Cotton and Products*(3-month moving average )

This is comprised of HS-code 52, which includes raw cotton, cotton yarn and cotton fabrics. Source: ITC


60

Meanwhile, Bangladesh continues to face backlash from its importers over the fire

incident that took place in one of its garment factories two years ago.21

Importers

from the US have taken a more critical stance on workers’ safety in factories:

Bangladesh’s apparel exports to the US have declined by 1.6 percent in Jul-Mar

FY15, over the same period last year.22,23

As a result, Bangladesh imported less

quantity of fabric from Pakistan and other countries.

India Reclaiming the UAE Rice Market

Overall rice exports declined sharply in Jul-Mar FY15, mainly because Pakistani

basmati is not able to compete with Indian varieties on marketing grounds. In

2013, India had exported a large amount of basmati to Iran24

, which had reduced

its stocks and availabilty for other markets. Pakistan benefited from this, and was

able to capture some of the Indian basmati market, especially in the UAE.25

However, from January 2014 onwards, Iran imposed a ban on rice import from

India on quality issues, which helped ease the unit price of Indian variety.26

As a

result, India was able to recapture its share in the UAE market, and Pakistan’s

exports began to lose. More specifically, Pakistan’s basmati exports to the UAE

have declined by 26.4 percent YoY in Jul-Feb FY15.

As far as non-basmati rice is concerned, the decline in exports was primarily on

account of a slump in global

prices ( Table 5.6). Quantum

exports have continued to shore

up, as a strong demand is

coming from African countries

including Kenya, Mozambique

and Sierra Leone. However,

Pakistani exporters must

remain vigilant as Thailand –

21 The overall growth in knitwear exports of Bangladesh has reduced from 17 percent in Jul-Apr

FY14, to only 2 percent in Jul-Apr FY15. Similarly, the growth in export of woven garments has

declined from 14 percent in Jul-Apr FY14, to only 3.9 percent in Jul-Apr FY15 (Source: Export

Promotion Bureau, Bangladesh). 22 Source: Office of Textile and Apparel (OTEXA), US Department of Commerce. 23 India and Vietnam were able to increase their shares in the US market. 24 Iran is the largest basmati importer in the world, with its rice import bill amounting to US$ 1

billion. Following the economic sanctions on Iran in 2012, India managed to have a mutual trade

agreement with Iran, which increased Indian basmati exports to Iran. In 2013, India exported 1.6

million tons basmati rice to Iran, and 537 thousand tons in H1-2014. 25 Pakistan exported 126 thousand tons basmati rice to the UAE in 2013, and 94 thousand tons in H1-

2014. 26 Iran imposed a ban on rice imports from India in November 2013.

Table 5.6: Rice Exports (Jul-Mar)

million US$

FY14 FY15

Quantum

impact

Price

impact

Change

in value

Quantum

impact

Price

impact

Change

in value

Total 264.6 15.6 280.1 -2.7 -94.5 -97.2

Basmati 1.8 68.0 69.8 -104.7 32.9 -71.8

Other 217.7 -7.4 210.4 41.0 -66.5 -25.4

Source: PBS


61

the largest exporter of non-basmati, is gradually firming up its exports after the

conclusion of the government’s stcokpiling program.27,28

Imports

Imports grew by 2.8 percent

during Jul-Mar FY15,

compared to only 0.8 percent

rise in the same period last

year. The significant decline

in petroleum imports was more

than offset by a sharp increase

in non-petroleum imports

(Figure 5.10).

Petroleum imports: price

effect was dominant

Petroleum imports declined by

US$ 2 billion (19 percent) in Jul-Mar FY15 compared to the same period last year.

This decline was driven primarily by a slump in global oil prices, though quantum

imports have also dropped by 3.4 percent.

The decline in quantum was

evident mainly in crude oil.

Cash flow constraints with

local refineries – attributed to

the re-emergence of circular

debt, did not allow them to

maintain the last year’s growth

momentum.29

In addition,

uncertainty in global oil prices,

and the resultant fear of

inventory losses, also discouraged refineries from importing crude. As a result, oil

marketing companies had to import more of the finished products, to meet the

increasing demand from consumers (Table 5.7).

27 The Thai government had initiated a rice purchase program in 2011. According to this program, the

government purchased rice from its farmers at about 40 to 50 percent above the market price. 28 FAO anticipates that Thailand may surpass the 2014 level of exports by 2 percent, shipping 11.2

million tons in 2015. 29 Jul-Mar LSM data show that the production of petroleum refining products grew by only 2.5

percent in FY15, compared to 9.5 percent in the same period last year.

Table 5.7: Product-wise Quantum Import of Petroleum

Import in 000 MT; growth in percent

H1 Q3

FY14 FY15 Growth FY14 FY15 Growth

FO 3,364.8 2,602.4 -22.7 1,451.4 1,371.0 -5.5

HSD 1,419.8 1,338.6 -5.7 423.1 583.9 38.0

Petrol 1,069.5 1,161.0 8.6 513.7 869.7 69.3

Crude 3,893.1 3,313.6 -14.9 1,883.1 1,973.8 4.8

Source: OCAC

-20 -10 0 10 20 30

Food

Metal

Transport

Machinery

Miscellanous

Agri & other chem.

Textile

Petroleum

percent

Jul-Mar FY15 Jul-Mar FY14

Source: Pakistan Bureau of Statistics

Figure 5.10: Major Imports (YoY change)


62

Within petroleum products, the demand for petrol and high-speed diesel (HSD)

was the strongest. This was because the government had been swiftly passing on

the impact of global price fall to consumers. Since CNG prices remained

unchanged throughout Jul-Mar FY15, the decline in petrol/HSD prices may have

diverted some consumers away from CNG.30

More specifically, sales firmed

up from December 2014

onwards, in response to price

cuts (Figure 5.11). During the

3rd

quarter, petrol and diesel

sales grew by around 35

percent each, on a YoY

basis.31

Anecdotal evidence

suggests that people have been

keeping their fuel tanks filled

as prices dropped so low. In

fact, the demand in January

was so strong that it took local

OMCs by surprise; there was a

severe shortage of petrol

across the country, as supplies from refineries remained short, and inventories

were not sufficient to match the demand.32

February imports were therefore

unusually strong.33

As far as furnace oil (FO) is concerned, its demand remained modest. Although

FO prices also fell sharply during the period, the retail power tariffs did not decline

proportionately; there is a lag of at least two months (on average) in fuel cost

adjustment. In addition, power producing companies were also facing liquidity

shortages due to circular debt (similar to refineries); their appetite for furnace oil

was also low.

30 After increasing by 6 percent in July 2014, CNG prices remained unchanged at Rs 73.04 per kg

from August 2014 onwards. Although CNG prices remained lower than the petrol, the differential

was narrowed sharply. Anecdotal evidence suggests that because of a low differential, some

consumers have preferred to fill petrol in their fuel tanks, instead of waiting in queues around CNG

stations. 31 The average petrol consumption during Jul-Mar FY15 remained higher by 18.4 percent, compared

to the same period last year. 32 During January, two refineries had to experience a shutdown due to operational constraints. 33 Pakistan imported 306 thousand MT of petrol in February 2015, which was more than double the

imports in February 2014.

50

60

70

80

90

100

110

120

200

250

300

350

400

450

500

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar-

14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar-

15

Th

ou

san

ds

MT

Sales by OMCs Price price - rhs

Rs / lit

re

Source: Oil Companies Advisory Committee and Pakistan Bureau of Statistics

Figure 5.11: Petrol Sales vis-a-vis Prices


63

Non-oil imports

Steel imports (both scrap and products) have reached a record-high level of US$

2.0 billion during Jul-Mar FY15 – a 35 percent growth YoY. Higher demand

basically reflects a rise in domestic construction activity in both public and private

sectors.34

Among the public projects, Rawalpindi-Islamabad Metro bus, Multan-

Faisalabad motorway, and LNG terminal at Port Qasim, are significant.

Demand for automobiles remained strong in Jul-Mar FY15, which increased the

import of CKD/SKD into the country. An extraordinary public liking for the new

model of Corolla, and the Yellow Cab Scheme of the Punjab Government,

increased car sales in the country (Chapter 2). Furthermore, import of railway-

related equipments have also remained strong during the period. These imports

basically reflect measures to improve the operational capacity of Pakistan Railway,

and reduce its losses.

5.6 Outlook

Pakistan’s exports are

geographically concentrated

in the EU and the US. So far,

Pakistan’s exports are still

intact with the EU market

despite the overall decline in

EU imports, especially the

value-added items like

knitwear and woven

garments. This was mainly

attributed to the GSP Plus

status, which allowed

Pakistani exporters to cut

through other exporters’

share (Figure 5.12). Exports

to other markets, however,

have fallen.

Going forward, it remains to be seen how the Eurozone economy responds to the

ECB’s liquidity injections. Uncertainty related to Greek crisis is also to be

resolved. Good news is that the Euro has begun to recover from its recent slump:

34 This is also evident from 8.4 percent YoY increase in local cement dispatches during Jul-Mar

FY15. (source: APCMA)

0.20

0.25

0.30

0.35

0.40

Sep

-12

No

v-1

2

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

per

cen

t

Figure 5.12: Pakistan's Share in Total Imports of EU-28 (3-months moving average)

Source: Eurostat


64

it has gained over 8 percent against the US$, since it bottomed out in mid-Mar.35

Fed’s indecisiveness over interest rates, and the recent unemployment numbers,

were key factors in weakening the US Dollar in April and May.

As for the US, its economy has posted a contraction in Jan-Mar 2015, as the strong

Dollar not only weighed on exports, but has also hit corporate profits. Retail sales

have remained week in April, which has dampened hopes of a strong rebound in

the second quarter of 2015. Increasing the federal fund rates at this point, may

back fire by further strengthening the US Dollar. Therefore, we do not expect

Pakistan’s exports to recover strongly in the near future.

For the long term growth in exports, we would stress addresssing the structural

issues in the economy via enhancing the resource base (e.g., via increasing the

availability of high-quality cotton and rice seeds); expanding the product range;

market diversification (e.g., exploring Africa and Russia); tariff reductions on

important inputs (like polyester fiber); and technology upgradation. As for the

imports, Pakistan should actively pursue all possibilities to reduce its dependence

on imported energy: domestic and foreign investors must be given due incentives

to expand oil and gas exploration activity, whereas, the process of making Thar

Coal usable, should be expedited. Furthermore, unncessary imports (especially

processed food, and luxury items) should be discouraged, whereas import

substitution in edible oil, chemcials, low-tech electronics, value-added plastic and

rubber industries, should be pursued.

In short, all the relevant stakeholders must sit together and formulate mutually

consistent trade and industrial policies of the country. The role of Ministry of

Commerce, Ministry of Industry, Planning Commission, Board of Investment,

Engineering Development Board, and TDAP, has become increasingly important.

35 The Euro has recovered from only 0.95/US$ on 13th March, to 0.88/US$ on 6th May (source:

Bloomberg).

Documents

Figure 5.1: SBP Liquid FX ReservesPakistan (CMPak - Zong) for network up-gradation to provide its customers 3G/4G data services. 8 During Jul-Mar FY15, there was an outflow of US$