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External sector of Pakistan

By: WAQAS AHMED

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Overview of external sector of pakistan

What is external sector………?Exchange rate Current account balanceFinancial accountInvestmentRemittancesDebts & liabilitiesForeign Reserves

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Current situation

Sharp deterioration in july-oct FY 09 Improvements in some sector & its reasons 83.9% Growth in overall external sector Revival of financial inflows Increase in foreign reserves Increase in value of rupee

Source:The state of pak economy 2nd quartly report 2008-09

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Exchange Rate The price of domestic currency in terms

of foreign currency is called exchange rate.

Types:Fixed exchange rateFlexible exchange rateClean floating exchange rateDirty floating exchange rate

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Terminology:

Devaluation & revaluationDepreciation & Appreciation Exchange rate in the long runTwo currencies are at ppp when a unit of

domestic currency can buy the same basket of goods at home & abroad.

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Real exchange rate

• Real exchange rate is calculated by this method

R= ePf/Pd

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Present situation

Pak rupee depreciated by 21% during mar-december2008.

The exchange rate will remain stable at around RS 80-82 per dollar and pak rupee recovered some of it earlier loses against the US $ and registered a net depreciation of 13.5% for the period july-feb 2008-09 [see fig-3]

• Source :(Ministry of finance)

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Investment What does investment mean…..??Investment mean increase in existing

stock of capital.Types of foreign investment & their

current situationForeign direct investment(FDI)Foreign portfolio investment(FPI)

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Net foreign investment:NFI overall declined by 34.2% during Jul-Feb

FY09 on the top of around 25% decline in the corresponding period of last year.

Foreign direct investment(FDI)During Jul-Feb FY09, FDI increased slightly

by .2% against a decline of 6.1% in the corresponding period of last year.

Decline due to absence of privatization proceeds, decline in remittances, decline in reinvested earnings, and tighter liquidity conditions in the international market

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Portfolio Investment

With the trend in emerging economies stock markets, foreign investors are taking their investment out from Pakistan's stock market.

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remittanceA remittance is a transfer of money by a foreign worker to his home country.Money sent home by migrant Moreover, remittance transfers can also promote access to financial services for the sender and recipient, thereby increasing financial and social inclusion s constitutes the second largest financial inflow to many developing countries, exceeding international aid.

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Significance

Remittances are playing an increasingly large role in the economies of many countries, contributing to economic growth and to the livelihoods of needy people (though generally not the poorest of the poor).

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As remittance receivers often have a higher propensity to own a bank account, remittances promote access to financial services for the sender and recipient, an essential aspect of leveraging remittances to promote economic development.

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Top recipients of migrant remittances among developing countries

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Top recipient countries

countries Remittances (2003–2004

Remittances (2006–2007)

(2007–2008) (2008–2009)

India $21.7 billion $26.9 billion

$26.9 billion $27 billion $45 billion

China $21.3 billion $22.52 billion $25.7 billion $34.5 billion

Mexico $18.1 billion $24.7 billion $23.97 billion $26.2 billion

France $12 billion $12.5 billion $13.75 billion

Philippines

$12 billion $17 billion $18.26 billion

Pakistan $3.9 billion $5.493 billion $6.50 billion $7 billion

*World Bank estimated

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the US economy, which constitute close to one third of

$ Million July February 2007 08 2008 09 % Change Total 4,126 4,919 19.2 USA 1,160 1,157 0.3 Saudi Arabia 762 962 26.3 UAE 682 1,035 51.9 Other GCC Countries 619 783 26.6 U.K 293 344 17.5 EU Countries 116 150 29.2 Other Countries 494 488 1.2

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Workers’ Remittances Workers’ Remittances totaled $ 4.9 billion in July February FY09 as against $‐ 4.1 billion in the comparable period of last year, depicting an increase of 19.2 percent. The remittances fell by 19.7 percent in October 2008 over October 2007 amidst difficult global environment and uncertainties surrounding domestic economy, however, they recovered to their normal high double digit growth since November 2008. Deep recession in the US economy, which constitute close to one‐

third of Pakistan’s remittances started taking its toll and witnessed marginal negative growth of 0.3

percent. The trend will be expected to continue in the months to come, however, overall outlook of remittances from other source countries is positive [See Table 9‐ ].

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Current A/C balance

• The current account balance is the difference b/w a country’s saving & its investment. If current account balance is +ve ,it measures the proportion of a country’s saving invested abroad. If –ve the proportion of domestic investment finance foreign savings.

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Component of current A/C balance

ImportsExportsNational accountsCurrent transfersIncomeServices

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Financial account

Financial a/c are concerned with classifying measuring & recording the transaction of business mainly it includes investment & its sub parts.

• Current situation……………………….?????

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Reserves

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Reserves Foreign exchange reserves are only the the

foreign currency deposits held by CB & Monetary authorities.

These are the assets of the CB held in different currencies mostly in dollar, euro & yen.

Who holds the reserves…..??

State bank of Pakistan Commercial banks

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Holdings of foreign exchange reserves by the central bank were $7.865 billion, compared with $7.805 billion in the previous week.

Foreign exchange deposits held by commercial banks were $3.364 billion, compared with $3.365 billion in the week ended April.

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Increase in central bank reserves during the period due to inflows from IMF(3 bn US $)capital inflows from ADB(761 million US $) & from China (500 million US $).

(source: The state bank of pak’s economy -2nd quartly report 2008-09Daily times 12-04-09)

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External debt & liabilities

External debt & liabilities recovered in 1st quarter & actually fell in absolute relative term.

EDL stood at 31% of the projected GDP.It implies that EDL grew both in absolute &

relative term.Highest increase in absolute term was

recorded in debt stock owed to the IMF as a result of inflow of 3.1$ bn.

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The countries' debt burden defined as a ratio of external debt & liabilities to GDP decline from 50.9 % at the end of 2001-02 to 27.6% of GDP by end June 2008.

thanksSource: ministry of finance

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Conclusion

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• thanksthanks