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Motif Pakistan’s Balance of Payments Prospects and Policy Proposals Services are the fastest growing sector in the global economy, constituting more than 60% of GDP of many countries. “Services are the largest and most dynamic component of both developed and developing country economies. Services currently account for over 60 percent of global production and employment. Services, such as telecommunications, banking, insurance and transportation are strategically important for enhancing overall economic efficiency, performance and growth. With services liberalization we may access quality service providers and as a labor-abundant country we can develop capabilities to capitalize our human resource with massive training and development programs and capacity building initiatives. This would generate savings, faster innovations enhance transparency and predictability with technology transfer and optimum utilization of the work force. The following factors seem to be affecting our exports: i. Law and order and “war on terror” affecting, among other things, the inflow of foreign direct investment (FDI) ii. Power shortage also affecting investment flows, both foreign and domestic. iii. Erosion of competitiveness because of the increase in unit prices of imports used as inputs for exportables. iv. On the demand side constraints are. a. Recession in the world economy although now there are some indications of an upturn. b. Dependence on raw material exports with low value added. c. A number of other countries have competitive edge in case of a number of commodities and services. d. We have not made any visible progress in diversification of our exports mix. 226 PAKISTAN BUSINESS REVIEW JULY 2010
Pakistan’s Balance of Payments Prospects and Policy Proposals Motif Around 30-35% of our imports are composed of crude/ furnace oil. We have to spend substantial amount on import of edible oil, chemicals and chemical products for manufacturing and agriculture, import of fertilizers, sugar and even wheat. Workers’ remittances are a big part of net transfers and it is this component that is largely supporting the balance of payments along with other private and official transfers. As our economy has the tendency of an increasing current account deficit, we are facing difficulties in financing this deficit. “War on terror” and expenditure on law and order is increasing our budget deficit and building pressures on our external resources because we are not generating enough public revenue. As a result the cost of borrowing is increasing; FDI inflows are drying up and exerting further pressures on cost of external financing. Our reserves have mainly been built on borrowing from the IMF. Policy Proposals Balance of payments problems may be resolved by taking the following steps: i. Efforts should be made to restore law and order and conclude the country’s “war on terrorism”. Both these factors are expected to pave the way for increase in production and exports. Also, these improvements should have salutary effects on FDI and tourism inflows. ii. Increase in FDI should lead to inflow of advanced technology, expansion in services and growth in production iii. Inflow of FDI should also lead to capacity building in human resource sectors with healthy effects on production. Even if skilled people move abroad, that should lead to expansion in home remittances. iv. In addition to improvement in law and order, visible progress should be made in good governance: particularly transparent and timely decision making, monitoring of efficient implementation and setting up effective accountability mechanisms. PAKISTAN BUSINESS REVIEW JULY 2010 227
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