Foreign exchange servers remain at comfortable level

Karachi: According to JSK Securities, the country’s foreign exchange reserves have eased yet stayed above a comfortable level at US$17.16 billion during the first week of June, resulting by an impressive influx of growth registered in inward remittances and exports. Remittances received during ten months of the current fiscal year surged over US$10 billion, up 25% against US$8 billion received during the same period of last fiscal year.

The rising trend in home remittances has largely been regarded as a sign that government efforts to curb illicit funds transfer systems have paid off during the outgoing year, reflecting a key success in some policy areas. Earlier, more than half of total annual remittances received by the country used to be transferred through illegal channels. In addition, a fast-track fund transfer system and attractive schemes by local banks have encouraged expats over time to transfer funds through formal banking channels.

In addition, remittances also witnessed a buoyant surge during FY2011 on account of donations and aid received from around the world due to the destructions caused by the ravaging waters in the country’s worst disaster. The rehabilitation and reconstruction aid helped in part to increase foreign inflows in 1HFY2011 and further into the second half. In this context, a significant contribution was collected by Pakistanis living abroad in the wake of destruction caused by ravaging floods in August 2010, also considered as the worst natural calamity to hit the country, damaging its infrastructure and livelihood worth US$10 billion.

However, an apprehension regarding the governance of these funds has remained one of largest deterrent to a free flow of funds. In April 2011 alone, remittances stood at US$1,030 million witnessing a growth of almost 36% from the amount received in the same period last year. The country’s total remittances for FY2011 are well on track to peak over the revised target of US$11 billion, providing a much needed cushion to the country’s economy with a suspended IMF program.

On the other hand, trade deficit has remained under check lately, owing to a whopping 33% growth in exports during May, recorded at US$2.28 billion. As per recent Federal Bureau of Statistics (FBS) data, trade deficit in 11MFY2011 was recorded just over US$13 billion, up almost 8% than the deficit during the same period in the previous fiscal year. Despite a strong growth in imports on the back of a surge in international oil prices and import of machinery, trade deficit has remained under check at around US$13 billion mark as exports surged to the tune of US$22.7 billion in the first eleven months of current fiscal year, up 25% from exports in the same period last year.

Imports for the same period have been recorded at a whopping US$36.5 billion depicting a growth of 17% from imports in same period last year. Given a healthy growth in remittances and exports, external balance account should not be affected much by rise in import bill thereby sustaining current level of foreign exchange reserves. Although, on a MoM basis, exports witnessed a moderate increase of 3% in April, a decline in imports, in part due to stabilization in oil prices, which kept trade balance under check. Moreover, it is expected that the country, for the first time, would be able to export goods worth US$25 billion in this year, as per the statement issued by the Ministry of Commerce.

JSK Securities believes that growth in exports is more likely to stabilize during the remaining period of the fiscal year based on the fact that there are better prospects for Pakistani exports as developed countries are set on the recovery path. Nonetheless, the burgeoning energy crisis that is crippling industries appears to be a major hurdle in achieving the export targets. If proper policy directive and planning is formulated for FY2012, the trade concessions could be solicited with other importing countries which could trigger huge growth in exports in addition to creating an international market for Pakistani products in food and other agricultural produce, in addition to textiles.

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