Pak Economic Stability Vulnerable: Report

Pakistans economy is passing through a critical short-term phase which can impact its macro-economic stability in a longer term perspective, said the report, received at the weekend. SISL, a brokerage house, forecast that external debt servicing would rise more than 30 per cent as a per centage of foreign exchange earnings in fiscal 1996-97 (July-June).

The current account gap would grow to 5.7 per cent of gross domestic product (GDP) in 1996-97, it said.

It cited State (central) Bank of Pakistan figures that put total external debt in 1994-95 at a provisional $24.4 billion, equivalent to 40 per cent of GDP at market prices. External debt servicing as a per centage of foreign exchange earning is projected to increase over 30 per cent in the current fiscal (1996-97) to a level of $4.0 billion, it said.

 

More disturbing, it argued, was a change in the debt profile towards shorter term liabilities.

Pakistans short- and medium-term external debt increased to $3.2 billion in 1994-95, four times its level in 1991-92. Debt servicing on this account increased more than four-fold over the same period to $1.37 billion, it said.

There is increasing speculation of late about Pakistans ability to meet its external debt servicing obligation due September-October (1996) estimated at $650 million, SISL said.

The report said a 19 per cent rupee depreciation against the dollar since July 1995 has helped the countrys exports.

But the inelasticity of imports coupled with a significant growth in imports in the food and agri-produce categories are putting persistent pressure on the trade account, it said.

SISL projected the 1996/97 trade deficit at $3.3 billion with imports at $12.1 billion and exports at $8.8 billion.

With robust growth in imports projected to continue...and pressure on foreign currency deposits reducing net inflows, the current account deficit is projected to increase in absolute terms to $3.9 billion or 5.7 per cent of GDP for fiscal 1996/97, from the current $3.6 billion or 5.5 per cent, it said.

SISL predicted that export performance would remain under pressure due to high domestic inflation. Pakistans consumer price index rose 9.54 per cent in August year-on-year, compared with 12.97 per cent in August 1995.

Domestic inflation was fuelled to a large extent by government profligacy in its current expenditure, and its increased resort to domestic bank and external short-term commercial borrowings, it said.

Bankers say the government has already borrowed more than 38 billion rupees ($1.027 billion) against a whole-year target of 20 billion rupees ($540.5 million).

SISL said outflows of about $200 million from forex deposits had been reported in recent weeks as investor sentiment eroded, and said any large-scale drain could pose serious problems.