7 Balance of Payment

7.1 Global Scenario

Emerging from the worst economic recession Figure 7.1: GDP Growth Rates (quarter-over-quarter, annualized)
of modern history, the global economy World
Advanced economies
appears to be on the path to a slow recovery. Emerging and developing economies
Earlier prospects of a robust recovery were hit 15
by adverse developments in the developed
economies, but so far healthy growth in the 10
emerging economies seems likely to propel 5

percent
world economic growth to 4.6 percent in
2010. This growth is, however, expected to 0
decline to 4.3 percent in 2011 on account of -5
inevitable cutbacks in stimulus packages in
the developed economies, fallout of the recent -10

Q1-2007
Q2-2007
Q3-2007
Q4-2007
Q1-2008
Q2-2008
Q3-2008
Q4-2008
Q1-2009
Q2-2009
Q3-2009
Q4-2009
Q1-2010
Q2-2010
Q3-2010
Q4-2010
debt crisis in Europe and weakness in the
financial system in the developed countries
(see Figure 7.1).

The prospects of global recovery by the end of 2009 were bright due to upsurge in industrial
production, rise in employment rates and pick up in trade and investment activities. These positive
developments were essentially the outcome of countercyclical monetary and fiscal policies adopted by
almost all major economies of the world. However, while expansionary fiscal and monetary policies
stimulated growth, they also led to ballooning of debt levels in large number of economies. The
problem has been particularly acute in the Euro zone where some counties were at the brink of default
and had to be bailed out. In the US too, after an initial rise in the consumer spending and production,
demand is weakening. It is also feared that the main driver of the global growth in 2010, the Chinese
economy could lose steam as the stimulus package works its way out of the system. Thus prospect of
growth for 2011 have been revised downwards.
Table 7.1: Major Indicators of World Economies
GDP growth Inflation rate CAB (percent of GDP)
2009 2010 2009 2010 2009 2010
World -0.6 4.6
Developed countries -3.2 2.3 0.1 1.5 -0.4 -0.4
USA -2.4 3.1 -0.3 2.1 -2.9 -3.3
Euro Area -4.1 1.0 0.3 1.1 -0.4 0.0
Japan -5.2 1.9 -1.4 -1.4 2.8 2.8
UK -4.9 1.3 2.2 2.7 -1.3 -1.7
Emerging markets 2.4 6.3
China 8.7 10.0 -0.7 3.1 5.8 6.2
Russia -7.9 4.0 11.7 7.0 3.9 5.1
India 5.7 8.8 10.9 13.2 -2.1 -2.2
Pakistan 2.0 3.0 20.8 11.5 -5.6 -3.8
Bangladesh 5.4 5.4 6.1 7.4 2.9 2.1
Philippines 0.9 3.6 3.2 5.0 5.3 3.5
Indonesia 4.5 6.0 4.8 4.7 2.0 1.4
Source: World Economic Outlook, April 2010 & World Economic Outlook Update, July 2010
State Bank of Pakistan Annual Report for 2009-2010

Although the financial crisis hit both the developed and emerging economies, the later proved more
resilient and recovered more quickly (see Table 7.1). Within emerging economies, the reocery was
led by Asia1. Further, countries with strong macroeconomic fundamentals were able to counter the
crisis much better. However, the sustainability of this ongoing recovery is dependent on continuation
of macroeconomic policies that support growth and employment. This is extremely important to boost
and sustain the consumer confidence that would ultimately help in improving the prospects of
economic recovery in the medium term.

The developed economies are facing a

Figure 7.2: Fiscal Balance as Percent of GDP
dilemma. If they continue to follow 2008 2009 2010
countercyclical policies; their fiscal deficits 0
are likely to swell to unsustainable levels and
if they roll it back they could stifle nascent -3
economic recovery that is underway. In
number of economies public debt has already -6
reached unmanageable proportions due to
which they are compelled to explore feasible -9
exit strategies that would invariably involve
-12
some form of fiscal consolidation and
restoration of financial discipline (see Figure
-15
7.2). A gradual reduction in stimulus
United United Euro Area China Malaysia Japan
packages seems to be one possibility under Kingdom States
the circumstances. Source: IMF and ADB

Emerging economies, on the other hand are facing a different sort of challenge. In these economies
the stimulus packages has led to overheating of these economies thereby generating inflationary
pressures. A possible exit strategy for such economies would be monetary tightening but its
effectiveness is in question as higher interest rates could attract capital inflows causing exchange rate
to appreciate in these countries thus hurting their exports.

Box7.1: Global Recovery a Regional Perspective

According to the world economic outlook, developed economies are expected to grow at 2.5 percent in 2010. However, the
growth during second half of 2010 is expected to be lower on account of financial turbulence. For 2011, output growth in
advanced economies is expected to remain broadly unchanged. High levels of public debt, unemployment and constrained
bank lending are the challenges that these economies would have to face. US economy is losing its steam in spite of being
well short of its capacity and helped by unprecedented support from monetary and fiscal policies.

Economic activity in emerging Asia has been sustained by robust exports growth and strong private domestic demand.
However, output growth is expected to decelerate in 2011 in these economies too. Within the region the drivers of growth
will be diversified. In China, given the strong rebound in exports and resilient domestic demand so far this year, the
economy is now forecast to grow by 10.5 percent in 2010, before slowing to about 9.5 percent in 2011, when further
measures are taken to slow credit growth and maintain financial stability. In India, growth is expected to accelerate to about
9.5 percent in 2010, as robust corporate profits and favorable financing conditions fuel investment, and then to settle to 8.5
percent in 2011. Both Newly Industrialized Asian Economies (NIEs) and ASEAN economies are expected to grow by about
6.5 percent in 2010, as a result of surging exports and private domestic demand, before moderating to 4.7 percent and 5.5
percent, respectively, in 2011.

Downside risks to world economic outlook have intensified during H2-CY10 and for CY11 following the financial
turbulence in the euro area. Asia has only limited direct financial linkages to the most vulnerable euro area economies, but a
stall in the European recovery that spills over to global growth would affect Asia through both trade and financial channels.
Many Asian economies (especially NIEs and the ASEAN economies) are highly dependent on external demand, and their
export exposure to Europe is at least as large as their export exposure to the United States. In the near term, the main risk is
an escalation of financial stress and contagion, prompted by rising concern over sovereign risk. This could lead to additional

1
Regional Economic Outlook (April 2010), IMF.
130
 Balance of Payments

increases in funding costs and weaker bank balance sheets and hence to tighter lending conditions, declining business and
consumer confidence, and abrupt changes in relative exchange rates. Given trade and financial linkages, the ultimate effect
could be substantially lower global demand. However, in the event of external demand shocks, the large domestic demand
bases in some of the Asian economies that contribute substantially to the region’s growth (China, India, and Indonesia) could
provide a cushion to growth.
Source: World Economic Outlook Update July 2010.

7.2 Pakistan’s External Account

Figure 7.3: Current and Financial Account
The current account deficit as a percent of Financial account Current account Overall balance
GDP witnessed remarkable improvement 12
during FY10 declining to 2.0 percent of GDP
8
from 5.7 percent in the previous year. This
contraction in the current account deficit was 4
instrumental in achieving overall external
0

billion US$
account surplus of US$ 1.2 billion after a gap
of two years. A cause of concern was -4
however, the deterioration in financial
account surplus in FY10 compared to the -8
previous year (see Figure 7.3). -12

Unlike FY09, when current account deficit -16

contracted mainly due to fall in import, FY05 FY06 FY07 FY08 FY09 FY10
contraction in current account deficit in FY10
was broad based, and both, trade and invisible accounts showed significant improvement. The Decline
in the financial account surplus, largely resulted from the fall in foreign direct investment as outflows
from the portfolio investment during FY10 were negligible, even after payment of maturing Sukuk
Bonds.

Most of the YoY improvement in external

Table 7.2: External Account Summary
account occurred in the first five months of
million US Dollar
FY10. Both, current and financial accounts
recorded substantial YoY improvement during Jul-Nov Jul-Jun
this period. Current account improved due to FY09 FY10 FY09 FY10
large contraction in the trade deficit as imports A. C/A balance -7245 -1433 -9261 -3495
contracted much faster than the simultaneous i) Trade balance -7054 -4690 -12627 -11423
decline in exports. The improvement in the Exports 8652 7678 19121 19632
trade account was supported by rise in the YoY growth (%) 11.2 -11.3 -6.4 2.7
invisible account surplus that benefited from the Imports 15705 12368 31747 31055
record workers’ remittances. Financial account, YoY growth (%) 25.6 -21.2 -10.3 -2.2
on the other hand gained from the inflows from ii) Invisible balance -191 3257 3366 7928
IMF. In the ensuing months, however, both the Remittances 2966 3832 7811 8906
current and the financial account deteriorated. Logistic support 365 0 912 1294
As a result full year improvement in the external FCA – residents -352 231 -271 629
account was not as impressive as it was in the B. Fin. and capital account 1843 2638 6087 5185
initial five months (see Table 7.2). Direct investment 1621 779 3720 2201
Portfolio investment -182 302 -1073 -64
Nevertheless, as a result of improved external Foreign loans 1117 1669 4031 3822
sector performance, foreign exchange reserves Amortization 893 687 1851 1804
reached at record level of US$ 16.9 billion as of C. Errors & omissions (net) -229 -262 118 -425
end June 2010 from US$12.8 billion last year. D. Overall balance -5630 943 -3056 1266
During the year the pressures on the rupee were
relatively lower due to which depreciation of the domestic currency was also limited to 4.7 percent.

131
State Bank of Pakistan Annual Report for 2009-2010

Although overall external account posted surplus and improved for the second consecutive year,
sustaining this improvement would be challenging going forward. This assessment is based on the
following; (a) current account deficit is likely to widen given the rising trend in international
commodity prices and adverse impact of devastating floods, (b) problems in arranging external
financing could also exacerbate due to uncertainty surrounding both the domestic and global recovery.
The rising trend in the international commodity prices is clearly discernable December 2009 onwards;
in fact the increase in the imports in H2-FY10 largely owes to increase in the commodity prices. This
coupled with increase in imports of construction material and some key food commodities due to
floods would inflate the import bill. On the other hand, exports growth could also lose momentum in
coming months as global economic recovery is expected to slowdown. In addition the persistence of
domestic factors such as energy crises, law and order situation, and increase in cost of inputs would
also have adverse impact on exports.

Given inherent weaknesses in the country’s external accounts, it is imperative to devise strategies,
both short-term and medium term that address these weaknesses. In the short-run well coordinated
fiscal and monetary policies aimed at curtailing aggregate demand and efforts to secure financing are
important. In the medium run, along with conducive monetary and fiscal policies, there is need to
boost exports and remittances so that dependence on foreign funding could be reduced.

7.2.1 Current Account Balance

Current account deficit contracted by 62.3 Figure 7.4: Composition of Composition of Changes in
percent during FY10 compared to 33.3 Changes in Invisible Balance Trade Balance
Imports Exports
percent decline in the same period last year. Services
6
Income
The contraction in current account deficit was Current transfers
broad based and all subcomponents of trade 5 3
as well as invisible accounts recorded
3
billion US$

billion US$

improvement over the last year (see Figure 0

7.4). All the components of current account 2
exhibited improvement of more than one -3
0
billion dollar in FY10. In particular, higher
exports, decline in imports, improved receipts -6
-2
under logistic support, lower payments under
other business services and higher inflows -3 -9
FY06

FY07

FY08

FY09

FY10

FY06
FY07
FY08
FY09
FY10

under workers’ remittances contributed

significantly in the contraction of current
account deficit during FY10.
Figure 7.5: Monthly Current Account Deficit
2000
Monthly data shows that most of the
improvement in current account was 1500
concentrated in H1-FY10 during which the
trade deficit contracted by 30.5 percent
million US$

1000
against an expansion of 5.7 percent in the
latter half of the year(see Figure 7.5).
500
Invisible account also pposted a surplus of
US$ 3.6 billion in H1-FY10 against US$ 400
0
million in the same period last year.
-500
Going forward current account deficit is,
Nov-09

Apr-10

Jun-10
Dec-09
Oct-09

May-10
Mar-10
Sep-09

Feb-10
Jan-10
Aug-09
Jul-09

however, likely to be higher due to adverse

affect of the flood that has damaged cotton
132
 Balance of Payments

crop2, food staples, livestock, and energy and transport networks. On the other hand, imports of
petroleum products and diesel, and iron & steel are likely to rise following the start of rehabilitation
activities. The extent of rise in current account is likely to be kept in check by the expected rise in
current transfers as; (a) expatriates send higer remittance in order to help families back home to
recover from the effects of floods, and (b) higher grants from international community.

7.2.2 Trade Account

A small recovery in exports and a decline in imports helped in the contraction of trade deficit, which
declined 9.5 percent in FY10 compared to a 15.7 percent contraction in the previous year. Recovery in
exports was led by the primary commodities such as rice, cotton, fruits and vegetables as a result of
better agricultural performance. Exports of jewelry and chemicals & pharmaceuticals also registered
significant growth. A surge in rice exports was attributed to lower production in two major rice
exporting countries India and Thailand, and the higher cotton exports were mainly because of lower
cotton production in the major cotton producing countries.

On the other hand lower imports were mainly the outcome of lower average prices of almost all major
commodities in international markets compared to the previous year. It is pertinent to mentions that
most of the YoY improvement in the trade account was concentrated in the first half of FY10. In the
second half commodity prices started rising in international markets, which was suplimented by rise
in quantum thus raising imports by over 18.0 percent. In particular, the imports of petroleum products,
fertilizers and road motor vehicles increased significantly during H2-FY10. Similarly, exports also
recorded healthy growth of 14.3 percent in the second half of FY10. (for details see section on
Trade).

7.2.3 Services Account

In FY10, deficit in services account witnessed a sharp decline (50.4 percent) for the second
consecutive year. A steep rise in services exports (25.4 percent) and significantly lower imports
compared to the last year assisted in bringing down services account deficit to its lowest level in six
years.

Increase in services exports was mainly contributed by logistic support, financial services and
communication services. Higher exports of communication services resulted from the steps taken by
Pakistan Telecommunication Authority (PTA)
with the coordination of (Long Distance and Figure 7.6: Income Account Deficit
International) LDI operaters to curb illegal Receipts Payments Income deficit
6
traffic (grey telephony) in the country.
Contraction in services imports was the result 5
of lower payments on account of freight
costs, travel expenses and other business 4
billion US$

services imports. A continuous decline during

the early months of FY10 in outflows through 3
exchange companies as well as lower freight
payments on account of decline in 2
merchandise imports were the main factors
1
behind this fall (for details see section on
Services).
0
FY06 FY07 FY08 FY09 FY10

2
As per initial estimates around 1.5 to 2.0 million bales have been destroyed because of floods in Pakistan and around 1.48
million acres agricultural land has been affected.
133
State Bank of Pakistan Annual Report for 2009-2010

7.2.4 Income (net)

Income account deficit declined for the first time in five years in FY10. This considerable decline of
25.8 percent was largely on account of lower
payments, which dropped to US$ 3.8 billion Figure 7.7: Sector-wise Repatriation of Profit and Dividends
during FY10 compared to US$ 5.3 billion in FY10 FY09
same period last year see Figure 7.6). The Petroleum refining
decline in income payments was broad based,
with declines recorded in purchase of crude Chemicals
oil, interest payments and profit & dividends. Oil & gas explorations

Food
The decline in repatriation of profit &
dividends during the period includes those Trade

sectors which were directly or indirectly Communications

affected by the circular debt problem as these Power
were operating below capacity. These include
Financial business
petroleum refining, power and oil & gas
sector (see Figure 7.7). The companies that 0 40 80 120 160 200
witnessed a significant fall include AES Pak million US$
Generation and Uch Power Project in power
sector, Pak Arab Refinery in petroleum refining sector and OGDCL and Pakistan oil field, in oil and
gas sector.

As regards the major increases in repatriation of profit and dividend, financial business,
communication and food sectors recorded YoY increase during FY10. In case of financial business,
dividend payments by two major banks with substantial foreign holdings explain this increase while
repatriation of profit under Pak Telecom explains the increase in communication sector. Two major
food manufacturing companies also repatriated higher profits and dividends in FY10 compared to
FY09. It is also notable that major part of repatriation of profits and dividends was concentrated in the
second and fourth quarter of FY10 showing seasonal pattern in such outflows.

The decline in net interest payments was mainly on account of fall in interest payments that more than
offset the fall in interest receipts during FY10. The main factors include: (a) lower interest rates in
international markets, (b) fall in the stock of relatively expensive debt of IDB, Euro Bond and private
debt, and (c) decline in interest payments on foreign currency accounts of local banks. A part of these
gains on account of income account were offset by increase in interest payments on IMF loans and
decline in interest earnings on foreign exchange reserves.

7.2.5 Current Transfers Figure 7.8: Components of Current Transfers

Current transfers recorded a healthy increase FCAs Remittances
Others Current transfers
of 15.4 percent in FY10 against a decline of 14.0
2.8 percent in the preceding year (see Figure
7.8). Current transfers increased on account of 10.5
persistent rise in workers’ remittances,
improved inflows in resident foreign currency
billion US$

7.0
accounts (RFCAs) and higher cash grants
mainly for internally displaced persons (IDPs)
3.5
from United Nations contributed to this
increase. In this regard government and SBP’s
0.0
efforts helped in the improvement in private
transfers. However, fall in other private
-3.5
transfers (US$ 653 million) partially offset
FY06 FY07 FY08 FY09 FY10
134
 Balance of Payments

the positive effects on current transfers. It is pertinent to mention that the other private transfers have
continuously declined after the SBP linked outflows from exchange companies to remittances
collected by them.3

Workers’ Remittances
Workers’ remittances recorded a remarkable Figure 7.9: Workers' Remittances
growth for the fifth consecutive year with
10
record annual receipts of US$ 8.9 billion in 8.9
FY10 (see Figure 7.9). This impressive 7.8
growth of 14.0 percent was entirely from 8

remittance inflows through the banking 6.4

billion US$
channels, remittances inflows through the 6 5.5
exchange companies on the other hand 4.6
4.2 4.2
registered a decline of 25.5 percent. A number 3.9
4
of factors can be attributed to the growth in
remittances through banks such as: (a)
2
crackdown on foreign exchange companies
involved in illegal money transfer, (b) tough
competition from banks, (c) low kerb market 0
premium through most of the year and (d) the FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
effect of Pakistan Remittance Initiative
(PRI)4. Monthly data shows that remittance growth during the initial months (Jul-Oct FY10) was
quite healthy, however it could not sustain its pace in the ensuing months: Nov-Feb FY10 and slowed
down significantly, but then picked up again in Mar-Jun FY10. The slowdown in remittances growth
during the middle part of FY10 was partly due to rise in kerb market premium5 and partly due to
disruption in economic activities following
terrerosit incident in Karachi. Figure 7.10: Workers' Remittances Vs Kerb Premium
Kerb premium (RHS) Remittances
The rise in remittance inflows during the 850 2.0
latter part of FY10 was mainly on account of
a fall in kerb market premium with the 770 1.5
increases registered not only bt all major
million US$

690 1.0
source countries but also all channels (see
Figure 7.10). In particular, remittances Rs
610 0.5
through banks reached record high level in
June 2010 reflecting the effect of relative 530 0.0
stability of rupee that led to increase in rupee
conversion of foreign currency accounts and 450 -0.5
the possible effect of Pakistan Remittance
May-09

May-10
Mar-10
Mar-09
Sep-08

Feb-09

Sep-09

Feb-10
Jan-09

Jan-10
Nov-08

Aug-09

Nov-09
Jul-09
Apr-09

Apr-10
Jun-09

Jun-10
Dec-08

Dec-09
Oct-08

Oct-09

Initiative.

Country wise data shows that growth in the

remittances during FY10 was driven by the increase in remittances from Kingdom of Saudi Arabia,
United Arab Emirates and United Kingdom. These countires contributed 32.7 percent, 32.0 percent
and 24.7 percent respectively in overall remittance growth. The remittances from other countries like

3
See FED circular number 4 dated May 09, 2008
4
PRI was introduced in August 2009 by the Ministry of Finance, Ministry of Overseas Pakistani’s and the State Bank of
Pakistan to boost workers’ remittances through official channels and to protect the remitter and beneficiary from any loss.
For details see SBP’s Annual Report 2008-09 and Quarterly Reports 2009-2010 (Q1 to Q3).
5
It is an important factor for remittance inflows. For instance exceptionally high premium in February 2010 caused sharp
fall in remittances inflows.
135
State Bank of Pakistan Annual Report for 2009-2010

USA, Canada, Qatar etc. also exhibited moderate Table 7.3: Country-wise Workers' Remittances
growth during the period under review (see million US Dollar; growth contribution percentage points
Table 7.3).Remittances routed through banks Countries FY09 FY10
Share in
showed robust growth for the second growth
consecutive year and contributed entirely in the Gulf region: 4,086.2 4,875.3 10.1

overall growth during FY10, whereas the Bahrain 153.2 151.3 -0.02

inflows of remittances through exchange Kuwait 432.0 445.1 0.17

companies declined significantly during this Qatar 24.9 34.8 0.12
period. This shows possibly the effect of steps Saudi Arabia 1,559.5 1,917.9 4.6
taken during the past couple of years such as; Oman 227.8 287.3 0.8
crackdown on some exchange companies, tie- U.A.E. 1,688.6 2,038.9 4.5
ups of domestic banks with foreign entities, U.S.A. 1,735.9 1771.3 0.4
lower costs of sending funds through banks (see U.K 605.6 876.3 3.5
Figure 7.11). Canada 79.1 115.1 0.5
Germany 100.7 81.2 -0.2
The pace of growth of remittance could, Japan 5.1 5.6 0.01
however, fall in FY11. Remittance could grow Australia 34.3 56.2 0.2
strongly in the initial months of FY11 as Others 1,164.1 1,124.5 -0.5
expatriats send more money to assist the Total 7,810.9 8,905.8 14.1

rebuilding effort after the floods. But in the

Figure 7.11: Contribution in Remittances Growth
later part of the year there is a possibility of Exchange companies Others(banks and post offices)
slowdown in remittances as; (a) Saudi Arabia 24
and other Gulf countries are localizing their
job markets and thus export of Pakistani
manpower to these countries could be 16
percentage points

adversly effected; (b) income levels of

Pakistani workers in the US and the Euro
8
zone may decline because of expected
slowdown in economic recovery after the
financial crisis. 0

Resident FCAs
Resident Foreign Currency Account (RFCAs) -8
showed a sharp reversal and exhibited an FY05 FY06 FY07 FY08 FY09 FY10
inflow of US$ 629 million in FY10 against an
outflow of US$ 271 million during FY09.
While the decline in RFCAs last year was Figure 7.12: Change in Resident Foreign Currency Accounts
mainly the result of rumors of possible FY09 FY10
freezing of foreign currency accounts, the 150
expectation of rupee depreciation was mainly
75
responsible for the rise in FY10 (see Figure
7.12). The rise in the RFCAs was contiuted 0
million US$

by both personal and corporate accounts.

Among the corporates UN, OGDC, and -75
Power Utility Company were among the main
concerns which registered health increases in -150
their FCAs.
-225

7.2.6 Financial Account -300

The decline in the financial account surplus
Apr
Oct
Aug

Nov
Dec

Jun
Jul

Mar

May
Sep

Feb
Jan

continued for the third consecutive year. Fall

136
 Balance of Payments

in foreign direct investment and other Figure 7.13a: Components of Figure 7.13b: Quarterly Analysis
investments led to 11.2 percent YoY fall in Financial Account Balance of Financial Account
financial account surplus. However situation Other investment FPI FDI 3.0
10.5
of portfolio investment improved as net 2.5 SDRs ADB
9 allocation 470mln
outflows decreased substantially in FY10 (see 2.0 US$
Figure 7.13a). 7.5
1.5

billion US$
6

billion US$
Quarterly analysis depicts that a large part of 4.5 1.0
financial inflows materialized in Q1-FY10 3 0.5
and Q4-FY10. This performance is largely
1.5
attributed to one-off IMF’s SDR allocation of 0.0

US$ 1.2 billion and ADB loan inflows of US$ 0 -0.5

470 million respectively. However, decline in

Q1-FY09
Q2-FY09
Q3-FY09
Q4-FY09
Q1-FY10
Q2-FY10
Q3-FY10
Q4-FY10
-1.5
loan inflows coupled with repayments of

FY06
FY07
FY08
FY09
FY10
maturing Sukkuk bond worth US$ 600
million deteriorated the financial account
balance in Q2-FY10 and Q3-FY10 (see Figure 7.13b).

It is important to mention that the payment of Sukuk bond was the primary reason for the net outflows
from portfolio investment in FY10, otherwise portfolio investment would have posted net inflows as
well. Improvement in portfolio investment
Figure 7.14: Debt and Non-Debt Flows
appears to be part of the risk diversification Non-Debt flows Debt flows
stretagey of foreign brokerage firms as well as 8
relatively better performance of the KSE.
Foreign direct investment continued to be
hampered by, relatively weak growth 6
billion US$

prospects, increased security risk and

prolonged power crisis.
4

In terms of share held by debt and non-debt

flows in financial account balance, non-debt 2
flows declined for the third consecutive year
due to poor performance of investment flows.
The increase in debt flows during FY10 was 0
due to combination of one time allocation of FY06 FY07 FY08 FY09 FY10
SDRs, IMF bridge financing loan to
compunsate for the short fall in FODP inflows and project loans from the ADB (See Figure 7.14).

Comparison of expected and actual loans largely explains the deterioration in the financial account.
During FY10 actual inflows remained well below the projected inflows for the year. Not only
program loans were below expectations but
Table 7.4: Inflows During FY10
FODP and IMF loans were also lower than million US Dollar
initially estimated (see Table 7.4). Had these Projected Actual
pledges materialized the picture of financial Project loans 1024.73 1058.45
account would have been quite different. Going Programme loans 4,459.5 1,941.7
forward, Pakistan’s requirements for foreign of which: Tokyo pledges 1,758.5 300.0
inflows is likely to increase as current account is IMF 4,656.4 3,526.0
expected to widen in FY11. Given that the SBA Source: Economic Affairs Division, Ministry of Finance &
with the IMF that has been the major source of International Monetary Fund(IMF)
financing in FY10 would end in FY11, it is all
the more important to chalk out a stretagey to reduce reliance on debt creating flows and instead work
137
State Bank of Pakistan Annual Report for 2009-2010

for a conducive environment that would enhance non-debt creating inflows. Efficient infrastructure,
good law and order situation and political stability along with stong economic fundamentals are key to
attracting foreign investment.
Table 7.5: Net Inflow of Foreign Investment in Pakistan
million US Dollar ; growth in percent
Net Foreign Investment
Foreign investment (net) fell by 19.8 percent FY09 FY10 Growth

during FY10 compared to last year. The main Foreign investment 2,665.4 2,136.8 -19.8
contributing factor behind this fall is the I. Private investment 3,209.5 2,789.2 -13.1
substantial decline of 40.8 percent in the foreign Foreign direct investment 3,719.9 2,201.3 -40.8
direct investment. This fall in investment inflows Portfolio investment -510.4 587.9 215.2
mainly owed to weakening macroeconomic Equity securities -409.8 600.9 246.6
fundamentals, power crises and deteriorating law Debt securities -100.6 -13.0 87.1
and order situation in the country. Moreover, II. Public investment -544.1 -652.4 -19.9
the payment of US$ 600 million for the maturing of which: Debt securities* -544.1 -652.4 -19.9
Sukuk Bonds put further pressure on the net * Net sale/purchase of Special US dollar bonds, Eurobonds, FEBC,
DBC, T-bills and PIBs
foreign investment flows during the period under
review. However, US$ 587.9 million investment equity market provided some cushion to falling
investment flows during FY10 (see Table 7.5).
Figure 7.15: Foreign Direct Investment
Foreign Direct Investment Reinvested earning Equity FDI growth
Decline in foreign direct investment 6 50
continued for the second consecutive year.
The YoY decline of 40.8 percent in foreign
4.5 25
direct investment is reflected by the decline in
both, equity capital and reinvested earnings.
billion US$

percent
Equity capital recorded a fall of 32.6 percent 3 0
where as reinvested earnings declined by 74.1
percent during FY10 (see Figure 7.15).
Domestic factors as well external factors 1.5 -25
contributed this fall in foreign direct
investment.
0 -50
On the domestic front, poor security situation, FY07 FY08 FY09 FY10
energy crises, weak macroeconomic
fundamentals and circular debt issue proved
to be main hurdles for investment flows. Figure 7.16: Inward FDI Flows in Regional Countries
These factors not only lowered the equity 2007 2008 2009
10
flows but also increase the cost of doing
business, which resulted in significant decline 8
in reinvested earnings during the period under
review. 6
billion US$

Moreover, these domestic factors coupled 4

with external factors further weakened the
2
foreign direct investment flows. Although
global economy recovered somewhat in FY10 0
environment of risk aversion reduced global
Philippines
Bangladesh

Pakistan
Vietnam
Korea

Taiwan

overall outward foreign direct investment

flows that recorded a decline of 43 per cent to

138
 Balance of Payments

$1,101billion in CY09.6Many companies delayed/postponed their investments amid global market

uncertainty, reduced corporate profits and difficulty in obtaining credit. Falling profits, rising financial
pressures on parent firms, and repayments of loans from foreign affiliates to their parent companies
caused this contraction. As a result, FDI inflows to developing countries contracted and many
countries observed a decline during CY09 and as such Pakistan was no exception (see Figure 7.16).
Apart from these issues, Pakistan also lagges behing in other factors that influence the level of FDI
(see Box 7.2)
Box 7.2: Factors determining the level of FDI
Although when it comes to economic liberalization and global integration, Pakistan’s stance is very encouraging yet the
stock of foreign direct investment as percentage of GDP in Pakistan has remained low as compared with some of the
emerging economies (see Figure 7.2.1).
Figure 7.2.1: Foreign Direct Investment
Some fundamental requirements have been pointed out
1995 2007 2008 2009
in order to increase the inflows of FDI in a country;
60
unfortunately Pakistan has so far failed or has been slow
in achieving these fundamental requirements.
Comparative analysis reveal that Pakistan’s ranking in 50
all the major factors is low compared some of the
as percent of GDP
regional countries (see Table 7.2.1). 40

Political Stability is instrumental in building the 30

confidence of foreign investors as politicak ensures
consistency in the economic policies. Unfortunately, 20
political instability in Pakistan has not only been
associated with administrative changes but also with the 10
changes in economic policies, which has deterred the
flow of FDI in Pakistan.
0
Economic strength is the basic prerequisite as Vietnam Malaysia Thailand Mexico Pakistan
macroeconomic stability reflects how strong an
economy is and how it can adjust to external or internal economic shocks. Unfortunately, low GDP growth, high inflation,
fallling industrial production and exchange rate volatility has cherectarized Pakistan’s economy in recent years.

Table 7.2.1: Countries Comparison of Global Competitive Indicators

Macroeconomic Health & Business Labor market
Countries Institution Infrastructure Market size Favoritism
stability education sophistication efficiency
Thailand 60 40 22 61 43 21 66 25
Malaysia 43 26 42 34 24 28 37 31
Vietnam 63 94 112 76 70 38 57 38
Mexico 98 69 28 65 62 11 85 115
Pakistan 104 89 114 113 81 30 87 124
Economic policies needs to be consistent and in line with global practices. However complex legal formalities and
amendments or altering of rules and regulations always creates an environment of uncertainty.

Government Bureaucracy is another problem area. Slow implementation of policies and no check and balance on these
policies reflects the poor management at the top.

Business Environment has not been made comfortable for foreign investors. Lack of professionalism is the major hurdle in
creating a friendly business environment.

Infrastructure facilities are below the international standards. From transportation and communication services to power
supplies, Pakistan is lagging behind not only in quality but also in terms of prices. For instance, Karachi port is much
expensive then Jebbel Ali.

Labor force is considered to be an important asset provided that it is well educated and skilled. Unfortunately in case of
Pakistan, majority of the labor force is unskilled and is proving to be a liability.

6
World Investment Report 2010, UNCTAD
139
State Bank of Pakistan Annual Report for 2009-2010

Protection of civil and property rights must be ensured in order to guarantee social and moral security to foreign investors.

Judicial system must be strong enough to enforce laws in letter and spirit. Strong judicial system is also imperative in order
curb corruption

These fundamental points coupled with technological innovation are very important in order to ensure foreign direct
investment flows in the country.

References
(1) “Foreign Direct investment In Pakistan: Policy Issue and Operational Implications” by Dr. Ashfaque H. Khan and Yun-
Hwan Kim (July 1999)
(2) “Global Competitiveness Report 2009-2010”
(3) “World Investment Report 2010: Investing in a Low-carbon Economy”

Table 7.6: Sector -wise Foreign Direct Investment

million US Dollar
FY09 FY10
Sectors Cash Re-invested earnings Total Cash Re-invested earnings Total
Oil & gas explorations 546.8 228.2 775.0 547.0 203.6 750.6
Telecommunications 900.7 -85.8 814.9 477.5 -103.9 373.7
Financial business 508.5 199.1 707.6 115.9 47.1 163.0
Trade 121.0 45.6 166.6 80.6 36.5 117.1
Chemicals 5.3 68.9 74.3 76.5 35.6 112.1
Petroleum refining 39.0 93.1 132.1 31.2 73.3 104.5
Construction 93.2 0.2 93.4 107.7 -6.1 101.6
Personal services 94.6 5.5 100.1 57.8 4.7 62.5
Cement 9.0 23.6 32.6 0.4 -1.6 -1.2
Power 151.0 -28.6 122.4 48.8 -160.5 -111.7
Others 512.4 188.6 701.0 465.9 63.3 529.2
Total 2981.6 738.3 3719.9 2009.4 191.9 2201.3

Component-wise analysis of foreign direct investment indicates that both declining equity and re-
invested earnings contributed in the fall of FDI. Although the decline in equity was more prominent
but reinvested earnings also deteriorated in comparison to FY09. The fall in reinvested earnings is
due to both fall in the profitability and increased loses of some major companies. However major
chunk of the fall in foreign direct investment is explained by lack of mergers & acquisitions, poor law
& order situation, power shortages and circular debt issue.

Sector-wise analysis shows that all of the major sectors received lower foreign direct investment
during FY10; a large part of overall fall stemmed from communication, financial and power sector
(see Table 7.6).

In case of communication sector, stiff competition, rising advertisement and utilities cost and energy
crises reduced the profits of mobile companies. Situation of telecom industry was further aggravated
by high borrowing cost and exchange rate losses due to Pak rupee depreciation. Consequently, four of
the five mobile operators incurred net losses during the year 2008-09.7

FDI in power sector also recorded a significant fall despite investment in KESC project at Port Qasim
and Uch Power Project. This contraction in FDI flows to power sector is mainly attributed to

7
Pakistan Telecommunication Authority, Telecom Quarterly Review, December 2009.
140
 Balance of Payments

divestment by one of the major power generation

Table 7.7: Country-wise FDI
companiesand outflows on account of losses
value in million US Dollar, growth in percent
incurred by KESC.8
FY08 FY09 FY10 FY10
Abs. YoY
Unlike the preceding year when investment Value Value Value
change growth
flows in oil & gas exploration sector increased, USA 1309.3 869.9 488.4 -381.5 -43.9
the marginal decline observed in FY10 is largely UK 460.2 263.4 294.6 31.2 11.8
explained by the law & order situation and UAE 588.6 178.1 242.7 64.6 36.3
circular debt issue that forced the companies to Total 5409.8 3719.8 2201.3 -1518.5 -40.8
operate below capacity. The drilling activities
also slowed down
during FY10. Investment flows in oil & gas
exploration sector largely stemmed from Figure 7.17: Foreign Portfolio Investment
investment in British Petroleum (BP) Pakistan Debt Equity FPI
Exploration & Production Inc. BP, however 3500
in line with the crisis related to BP, is 2800
expected to divest exploration and production
operations in Pakistan by the December 2010. 2100
9
In case of this divestment to local company,
million US$

1400
investment flows may face a decline going
forward. Major companies recorded FDI 700
inflows other than above sectors included
0
APL Co PTE Ltd (Transport) US$ 154
million, Packages (Pvt) limited (paper & -700
pulp) US$ 80 million, Shell Pakistan Ltd
-1400
(Trade) US$ 39 million and Dawood Hercules
FY05 FY06 FY07 FY08 FY09 FY10
Chemicals Ltd (chemicals) US$ 38.9 million
during the period under review.

Country wise FDI

Country-wise analysis of foreign direct investment indicates that major inflows originated from USA,
UK and UAE. Both UK and UAE showed
Figure 7.18: Regional Portfolio Flows in Equity Market
modest recovery in FY10 after registering a FY09 FY10
substantial decline in FY09. However, FDI 10000
from USA continued to decline for another
year falling 43.9 percent during the period 8000
under review (see Table 7.7).
6000
million US$

Foreign Portfolio Investment 4000

Foreign Portfolio investment registered net
outflow for the second consecutive year, 2000
however this year the net outflow was
0
relatively smaller than last year (see Figure
7.17). This capital outflow was contributed -2000
by repayment of maturing Sukuk bonds worth Philippines* India Pakistan
(US$ 600 million) which more than offset the *The data is for Jul-Mar period .
impact of equity inflows.

8
AES Lalpir Ltd.and AES Pak Generation based in Muzaffergarh.
9
British Petroleum’s decision to pullout from Pakistan is in line with its plan to sell global assets to help raise funds to
compensate for the oil spill in the Gulf of Mexico.
141
State Bank of Pakistan Annual Report for 2009-2010

In case of equity inflows, improved performance of stock market10 attracted foreign investors and
investment in equity market increased substantially during FY10. Factors like re-entry of the country
into MSCI frontier market index and fall in Pakistan’s risk premium as reflected by Credit Default
Swap (CDS) spread proved to be instrumental in attracting investment. 11 The improvement in foreign
portfolio flows in equities is broadly in line with the portfolio flows of some of the regional
economies (see Figure 7.18). Investment in stock markets of all the three countries turned positive in
FY10 owing to improved economic indicators. Stock markets of both the developed and emerging
economies were severly affected as financial crisis intensified in FY09.

Outstanding Export Bills

The stock of aggregate outstanding export bill increased by US$ 423 million in FY10 as compared
with declining stock of outstanding export bills during FY09. The increase in stock of OEBs
stemmed from the stock held by exporters. These increased by US$ 420 million whereas stock of
outstanding bills held by commercial banks
Figure 7.19: Outstanding Export Bills
increased by only US$ 3 million. Exports OEBs (RHS)
21 0.8
This increase in aggregate stock of
outstanding export bills is in line with the
rising merchandise exports. The outstanding
19 0.4
export bills declined in FY09 due to fall in
billion US$

billion US$
exports, however with the revival in exports
during FY10, the outstanding export bill also
increased (see Figure 7.19). Moreover, the 17 0
increase in stock of OEBs can also be
attributed to depreciation of Pak rupee as
market players hold back their earnings to
take advantage of expected local currency 15 -0.4
depreciation. FY07 FY08 FY09 FY10

Currency and Deposits (Assets)

Currency and deposits recorded a decline of US$ 428 million during FY10 compared to a decline of
US$ 229 million observed during FY09. In line with last year’s fall, this drop is largely explained by
the decline in commercial banks’ FE-25 nostros. It is pertinent to mention although commercial
banks’ FE-25 nostros declined in FY09 as well but the large fall of US$ 383 million in FY10 is
attributed to shifting of oil payments to interbank market during FY10 that added pressure on
commercial bank nostros.

Official Long Term Loans (net)

This head recorded a net inflow of US$ 2.0 billion during FY10 against an inflow of US$ 1.6 billion
received during FY09. Although the amount of repayments remained almost the same in both years
but it was increase in loans that resulted in higher inflows during FY10. The large part of this increase
stemmed from bridge financing from IMF i.e. US$ 1.1 billion. Other part of increase stemmed from
ADB (US$ 0.6 billion) and World Bank (US$ 0.4 billion).

Official Short Term Loans (net)

The official short term loans registered net outflow of US$ 620 million during FY10 in with net
outflows of US$ 123 million in the preceding year. Although the level of inflows remained relatively
the same in both years, it was the repayments that made the difference. Repayment of US$ 973

10
Stock market performance is reflected by KSE-100 index value.
11
Credit Default Swap (CDS) spread fell to 497.8 basis points on August13, 2010 from 1863.7 basis points on May 5, 2009.
142
 Balance of Payments

million to IDB was the prominent factor Figure 7.20: Trade Financing
behind the overall net outflows during FY10. 500
Had this repayment not been made, the
official short term loans would have recorded
a net inflow. 250

million US$
Private Loans
The private loans net inflows declined by US$ 0
568.0 million during FY10. The interesting
development was that the level of repayments
remained the same; however it was the -250

decline in inflows of private loans that

resulted in the overall decline. The major
-500
companies that recorded loan inflows were
FY06 FY07 FY08 FY09 FY10
KESC (US$ 115 million), Fauji Cement
Company Ltd (US$ 74 million), Engro
Chemical Pakistan Ltd (US$ 50 million) and Pakistan Refinery Ltd (US$ 50 million) during FY10.

Currencies and Deposits (liabilities)

Currency and deposits increased by US$ 230 million during FY10 compared with the increase of
US$ 299 million in the corresponding period last
year. This decline was entirely attributed to fall Table 7.8: Summary of Consolidated Services Trade Account
in rupee accounts held by non-residents. million US Dollar, growth in percent
However, this decline was offset to the greater Abs. value growth
extent by the disbursement of US$ 187 million FY09 FY10 FY09 FY10
worth of trade loans against FE-25 deposits. It is Total exports 4,106.0 5,147.1 14.4 25.4
important to mention that trade financing of which
recorded net disbursement in FY10 against net Transportation 1,231.0 1,149.3 18.9 -6.6
retirement for the last two years (see Figure Government services 1,523.0 2,527.9 10.4 66.0
7.20). This is mainly due to the relative Total imports 7,487.0 6,805.2 -25.5 -9.1
exchange rate stability during the period under of which
review. Transportation 3,633.0 3,455.0 -4.0 -4.9
Other business services 1,648.0 1,082.3 -52.0 -34.3
7.3 Trade in Services Trade balance -3,381.0 -1,658.1 -47.6 -51.0
During FY10, services account deficit contracted
by 51.0 percent YoY compared to 47.6
percent decline last year (see Table 7.8). The Figure 7.21: Contribution in Services Exports
improvement in the trade balance reflected Transportation Government Other business
Travel Computer & infor. Others
acceleration in the exports growth and a 45
contraction in imports during the year.

The impressive growth in the services exports 30

percent growth

during FY10 was on account of robust

performance by the government services 15
sector. Fortunately, this was complimented by
fall in transportation and other business
0
services imports, resulting in a substantial
decline in the services trade deficit.
-15
FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

7.3.1 Services Exports

Services exports registered a growth of 25.4
143
State Bank of Pakistan Annual Report for 2009-2010

percent during FY10 compared to growth of 14.4 percent last year, largely due to better receipts under
“government services exports”. As a result, the government services exports during FY10 has restored
its largest contribution in overall services export growth (see Figure 7.21).

Government services exports posted a robust growth of 66 percent during FY10 compared to 10.3
percent in the same period last year (see Table 7.9). Compositional breakup reveals that the major
Table 7.9: Government Services Exports
million US Dollar ; share and growth in percent
Absolute amount Share Growth
FY09 FY10 FY09 FY10 FY09 FY10
Logistic 1100.0 1649.7 72.2 65.3 19.9 50.0
Non- logistic 422.7 878.2 27.8 34.7 -8.6 107.8
Remittances recieved. by foreign missions in Pakistan 260.3 289.0 17.1 11.4 2.7 11.0
Other government services 12.7 11.8 0.8 0.5 -53.1 -6.8
Remittances received by int. rg. 32.3 268.0 2.1 10.6 -35.2 729.1
Receipt through central govt. 0.0 0.0 0.0 0.0
Receipts through international bodies 85.0 253.8 5.6 10.0 -14.4 198.6
Earnings of Pak diplomatic mission abroad 32.4 55.5 2.1 2.2 -1.5 71.4
Total 1522.7 2527.9 100.0 100.0 10.3 66.0

contribution in the growth during FY10 came from the non-logistic receipts which recorded an
increase of 107.8 percent compared to a decline of 8.6 percent last year. Non-logistic support
increased on account of rise in receipts from
international bodies as well as remittances Table 7.10: Major Services Exports
received by international organizations. The billion US Dollar
abrupt growth in the receipts under these two FY09 FY10
heads increased their share to 20.6 in the Jul-Mar Apr-Jun Jul-Mar Apr-Jun
government services exports from only 7.7 Transportation 1019 212 839 310
percent last year. This increase probably reflects Travel 248 66 273 68
the extended financing received by UN and non- Communication
78 118 184 62
UN agencies for carrying out operations related services
Other business
to the rehabilitation of IDPs. A part of rise in services
371 122 397 140
non-logistic support could also be attributed to Government services 858 665 1126 1402
the increase in remittances received by the Others 277 72 274 72
foreign mission in Pakistan, probably reflecting Total Exports 2851 1255 3093 2054
the increased spending by foreign embassies and
consulates in view of the deteriorating law and order situation in the country.

Despite significant rise in the non-logistic support, logistic support still has the largest share in the
government services exports during FY10.The increase in the logistics support inflows owes to the
reimbursement of validated claims of the previous years by the Pakistan under logistic support fund.

Quarterly analysis of government services expo ts shows that the receipts under this head saw a
marginal increase during Jul-Mar FY10 compared to last year. However, end-June services trade
accounts observed a large addition to the government r services export during Q4-FY10. As a matter
of fact, government services export during Apr-Jun FY10 represents 55.5 percent of the receipts of the
entire fiscal year (see Table7.10). The huge addition to government services export in Q4-FY10 was
led by US$ 1.2 billion rise in logistic support.

Transportation services exports witnessed a decline of 6.6 percent during FY10 against an increase of
18.9 percent last year. The reduction in exports of transportation services is attributed to decline
144
 Balance of Payments

freight earnings on account of falling

Figure 7.22: Passage Earnings of Pak Air Lines
merchandise exports and reduced local 20
operations of foreign transport companies. On
the other hand “passage earnings “of domestic 15
airlines which comprise more than half of the 10

percent growth YoY

overall transportation services exports
remained at the FY09 level. 5

0
Monthly analysis reveals that passage
-5
earnings of domestic airlines decreased in the
initial months of FY10(see Figure 7.22).This -10
was mainly due to a fall in seat occupancy of
-15
the international flights of national airlines,

Nov-09

Apr-10

Jun-10
Dec-09
Oct-09

May-10
Mar-10
Sep-09

Feb-10
Jan-10
Aug-09
Jul-09
reflecting the reduced number of foreign
travelers due to worsening law and order
situation in the country. However in the latter
Figure 7.23: Composition of Computer Services Exports
months of FY10, some recovery was seen in Others Computer services
passage earnings of Pakistani airlines that Export of computer software Software consultancy services
came in the wake of decision by some of the 100
international airlines to discontinue their
operations in Pakistan due to security 80
concerns. As a result, the national air carrier
PIA opened up some new destinations and 60
percent

increased flight frequency to some of the

established destinations. 40

Freight earnings declined by 16 percent 20

during FY10 against 4 percent decline last
year. It may be noted that global freight 0
markets were still under pressure by the FY09 FY10
economic downturn in early months of
FY1012. However, since March 2010, freight earning has seen a return to positive year on year
growth. This recovery, however, again saw a dip in the month of April 2010, as airline lost freight
revenues, following volcanic eruption in Iceland that disrupted flight earnings through most of Europe
and North America. Other local disbursements of foreign airlines and shipping companies also fell by
15 percent YoY on account of stoppage of flight operations by six gulf-states airlines following
deterioration in law and order situation in the country.

12
IATA reports that Airlines lost $9.9 billion during financial year 2009. Passenger traffic fell 2.1 percent, while cargo
dropped to 9.8 percent.
145
State Bank of Pakistan Annual Report for 2009-2010

Computer and information services exports Figure 7.24: Composition of Services Imports
witnessed a modest increase of 2.3 percent Others Government services
during FY10 in contrast to the outstanding Other business services* Travel*
Transportation Exchange companies
growth rates of 19.5 in the same periods last. 100
The deceleration in growth of this sector
might be attributed to falling foreign demand. 80
The notable performance of software
consultancy services and computer software 60

percent
export was largely offset by the decline in
40
other computer services category leaving the
overall growth to much lower level (see 20
Figure 7.23). Monthly analysis reveals that
from December 2009 onward, the growth of 0
exports of computer and information services FY06 FY07 FY08 FY09 FY10
is back on track after suffering a slump in the *Excluding exchange companies
wake of global economic recession. The
export growth gradually got momentum with the recovery of developed economies where Pakistan
has good markets13.

Exports of communication services recorded a Table 7.11: Communication Services Exports

growth rate of 25.7 percent during FY10 million US Dollar
compared to 67.1 percent during previous year Abs. value Growth
(see Table 7.11). The major contribution in the FY09 FY10 FY09 FY10
overall communication growth came from the Postal services 0.1 0.3 152.4 492.5
rising exports of telecommunication services Courier services 0.9 1.2 -69.5 28.2
through the authorized telecom operators, Telecommunication
177.0 227.7 77.4 28.6
following aggressive measures taken by Pakistan services
Call centre 17.5 16.6 24.3 -5.4
Telecommunication Authority (PTA) against
Total exports 195.6 245.8 67.1 25.7
illegal exchanges.

Similar to communication services, growth in the travel services export also declined significantly
during FY10 compared to last year. Travel
services exports on account of foreign tourists Figure 7.25: Monthly Imports Growth
which constitutes almost 80 percent of overall Freight payments Merchandise imports
travel services exports recorded 35 percent 75
growth during FY10 compared to a decline of
50
14 percent last year. This probably reflects the
revival of the tourism industry, as the major
25
percent

scenic sites were being cleared off the

militant groups in late 2009. 0

Other business services export fell by 0.5

-25
percentage points to reach at 9.0 percent
during FY10. This decline is attributable to -50
the fall in agency commission, architect &
May-09

May-10
Mar-09

Mar-10
Sep-08

Feb-09

Sep-09

Feb-10
Jan-09

Jan-10
Jul-08
Aug-08

Nov-08

Jul-09
Aug-09

Nov-09
Apr-09

Apr-10
Jun-09

Jun-10
Dec-08

Dec-09
Oct-08

Oct-09

technical services and miscellaneous items.

This fall, however, was largely compensated
by the positive contributions by Business &

13
USA is the largest buyer of IT-enabled services with of 50.4 percent share, followed by UK with 15 percent share in total
IT services export.
146
 Balance of Payments

management consultancy & public relations and the Misc. other business services in the overall
business services export. Also refunds on weight loss or claims on price saw a fall during FY10,
mainly due to lower level of imports in the period under discussion.

7.3.2 Services Imports

Pakistan’s overall services imports stood at US $ 6.8 billion during FY10; registering a decline of 9.1
percent compared to 25.5 percent fall in FY09. The decline in the services imports was broad based,
as all major groups experienced negative growth; except for government services imports. The
continued decline in the services imports was primarily due to the restrictions on the foreign exchange
outflow from foreign exchange companies imposed by SBP14. It is pertinent to note here that the large
portion of services import routed through exchange companies were captured by travel and other
business services categories in overall services import in past years (see Figure 7.24).In addition to
fall in the foreign exchange companies’ outflows, the decreased payment of freight was the other
major factor behind the fall in the overall services import. This was attributed to lower merchandise
imports and reduced passage earnings of foreign airlines during the year. Freight payments which
constitute almost 73 percent of overall transportation services imports increased by only 3 percent
during FY10.Monthly analysis reveals that freight payments observed a YoY decline in H1-
FY10.However in the second half of the FY10 freight payment increased in line with recovery in the
merchandised imports (see Figure 7.25). The payments to foreign airlines also witnessed fall of 22
percent during FY10 compared to a 2 percent last year. This was mainly due to the closure of flight
operations by some major international airlines.

Travel services imports declined by 12

percent during FY10, reflecting outflows Figure 7.26: Categories Under Travel Services Imports
Others Exchange companies
restrictions on exchange companies. As a Religious travel Holiday
result, share of exchange companies in travel Students and trainees
services imports declined to 62 percent in 100
FY10 from 68.4 percent last year (see Figure
80
7.26). Also, payments under the religious
travel (Hajj) decreased by 11.0 percent during
60
percent

FY10 compared to a rise of 8 percent last

year. This might be explained by the decline 40
in the number of pilgrims during the year15.
Furthermore, the category of holiday on 20
recreational tours abroad recorded strong
growth, raising its share to 8.5 percent in 0
FY10 from 1.4 percent last year. FY07 FY08 FY09 FY10
The other business services also experienced
a fall of 34 percent during FY10 compared to the decline of 52 percent in the previous year. Similar to
travel services imports, the other business services continued to decline, primarily due to outflows
restrictions by SBP on exchange companies initiated from May 2008.As a result, the share of
exchange companies dropped to 12 percent, which was nearly 73 percent in early 2008 in overall
other business services imports (see Table 7.12). In contrast, government services imports posted an
increase of 40 percent during FY10 compared to a decline of 3.7 percent last year.

14
During FY09 SBP imposed number of restrictions on outflows from exchange companies that curtailed both imports and
export payments through exchange companies.
15
According to Hajj Policy 2009, the number of pilgrims under the Government Scheme declined by 5,000 during 2009
compared to last year.
147
State Bank of Pakistan Annual Report for 2009-2010

Table 7.12: Other Business Services Imports (Major Components)

million US Dollar
Abs.values Share
FY08 FY09 FY10 FY08 FY09 FY10
Merchanting services 5.8 14.4 7.9 0.2 0.9 0.7
Charter of ships without crew-on.leasing 0.5 9.2 25.9 0.0 0.6 2.4
Legal services 48.7 30.4 5.3 1.4 1.8 0.5
Buss. & mang. consult., and public rel. 32.8 52.6 50.1 1.0 3.2 4.6
Agency commission 144.8 154.8 176.7 4.2 9.4 16.3
Adv., market res., & public opin. Poll. 14.8 9.6 14.3 0.4 0.6 1.3
Research and development Services 3.1 2.0 4.8 0.1 0.1 0.4
Architect., eng., and technical services 83.8 149.0 150.6 2.4 9.0 13.9
Payments to journalists 2.9 1.9 0.4 0.1 0.1 0.0
Technical fees to foreigners 530.6 541.7 444.8 15.5 32.9 41.1
Miscellaneous services, n.s.e. 109.3 197.7 132.5 3.2 12.0 12.2
Exchange companies 2504.0 530.0 129.0 73.0 32.2 11.9
Refund -58.4 -58.9 -63.4 -1.7 -3.6 -5.9
Total 3432.2 1648.0 1082.1 100.0 100.0 100.0

7.4 Foreign Exchange Reserves

During FY10, Pakistan’s foreign exchange reserves increased by US$ 4.0 billion to reach a new peak
of US$ 16.9 billion (see Figure 7.27). A host of factors contributed to the increase in the reserves, this
included relatively small trade deficit, healthy
Figure 7.27: Foreign Exchange Reserves
growth in the remittances, inflows from the Cumulative change in reserves
IMF and enhancement of the SDR quota. Total forex reserves (RHS)
Shifting of the oil payments back to the 5 18

interbank also helped in plugging the drain on 4 17

the SBP reserves. As against a significant
improvement in FY10 the rise in reserves was 3 16
billion US$

billion US$
relatively modest at US$ 1.3 billion in FY09. 2 15

The difference between the two years is 1 14

largely explained by the difference in the 0 13

current account. In FY09 while the current
account had contracted by 33.2 percent it was -1 12
Nov-09

Apr-10

Jun-10
Dec-09
Oct-09

May-10
Mar-10
Sep-09

Feb-10
Jan-10
Aug-09
Jul-09

still quite large (US$ 9.3 billion) in absolute

terms. In FY10, not only the current account
contracted further by 62.1 percent, it became
quite small in absolute terms as well. Thus even as there was not much difference in the financial
accounts between the two years the build up in the reserves was significantly higher in FY10.

148
 Balance of Payments

Most of the increase in the reserves during Figure 7.28: SBP Net Interventions
FY10 was on account of the rise in the SBP FY09 FY10
reserves which increased by US$ 3.6 billion 500
while commercial banks’ reserves recorded
relatively small increase of US$ 0.46 billion.
0
Besides IMF inflows, SDR allocations and

million US$
funds received on account of the logistic
support, SBP reserves also benefited from the -500
discontinuation of market support for oil
related payments. These payments had earlier
-1000
consistently drained SBP reserves and were
responsible for sever depletion of reserves in
FY08. -1500

Apr
Aug

Nov
Oct

Dec

Jun
Jul

Mar

May
Sep

Feb
Jan
It may be recalled that in order to ward off
speculative attacks on the domestic currency,
SBP started providing hard currency for oil Figure 7.29: Financial Account Surplus
4
related payments in Nov 2004. However, as
part of the structural adjustment program
3
agreed with the IMF, beginning Feb 2009,
SBP gradually withdrew this support. Entire
2
billion US$

oil payments were transferred to inter-bank in

Dec 2009. As can be seen from the figure this
1
resulted in significant decline in the SBP net
market interventions (sales – purchases) 0
which declined from US$ 3.3 billion in FY09
to US$ 263 million in FY10 (see Figure -1
7.28).
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Quarterly analysis of the forex reserves FY05 FY06 FY07 FY08 FY09 FY10
indicate that more than half of the full year
increase in the reserves was realized in the first quarter of FY10. During this quarter not only the
current account deficit was just US$ 586 million but the financial account surplus was also one of the
highest in recent years (see Figure 7.29). As discussed earlier, the surplus in the financial account
owed to US$ 1.2 billion program loan received from the IMF and enhancement of the SDR quota. It
may be pointed out that though the SDRs are
accounted for as reserves they are actually an Figure 7.30: Commercial Banks' Reserves
asset which a country can exchange for a hard Cumulative change in reserves
Total commercial banks'…
currency in time of difficulty. The country 0.6 4.0
that is willing to exchange SDRs for the hard
0.5 3.8
currency usually changes a fee (mark-up) for
this exchange. Thus SDRs are more of 0.4
billion US$

billion US$

3.6
notional reserves.
0.3
3.4
In contrast to the Q4-FY10, in Q2-FY10 not 0.2
only the current account deficit increased but 0.1 3.2
the surplus in the financial account also
decreased substantially, as a result, some 0.0 3.0
May-10
Nov-09

Apr-10

Jun-10
Dec-09
Oct-09

Mar-10
Sep-09

Feb-10
Jan-10
Aug-09
Jul-09

deterioration in the reserves was observed

149
State Bank of Pakistan Annual Report for 2009-2010

Table 7.13: Overall Reserves as per BOP- BPM-5

million US Dollar
FY09 Total FY10* Total
Q1 Q2 Q3 Q4 FY09 Q1 Q2 Q3 Q4 FY10*
Opening balance 11,510 7,975 9,718 10,381 11,510 12,038 14,301 14,543 13,736 12,038
Inflows 12,227 14,740 11,549 12,802 51,318 13,562 12,383 10,721 15,086 51,752
Exports of goods 5,711 4,379 4,231 4,800 19,121 4,620 4,678 5,025 5,309 19,632
Export of services 1,133 941 777 1,255 4,106 838 1,021 1,234 2,055 5,148
reimbursement logistic
365 0 100 447 912 0 0 349 945 1,294
support
Income 210 298 185 181 874 106 139 187 130 562
Workers' remittances 1,879 1,761 2,018 2,153 7,811 2,331 2,199 2,021 2,355 8,906
Kerb market Purchases 0 0 0 0 0 0 0 0 0
Foreign direct investment 1,117 1,234 691 678 3,720 477 541 536 647 2,201
Foreign portfolio investment -171 7 -254 -93 -511 248 62 146 132 588
Euro / Sukuk Bond 0 0 0 0 0 34 0 42 76
Loan disbursements 860 4,470 1,196 2,130 8,656 1,972 1,604 582 2,646 6,804
Official 715 4,061 883 1,933 7,592 1,817 1,512 553 2,452 6,334
Long-term loans 715 3,460 795 1,888 6,858 1,817 1,512 232 2,204 5,765
Program loans 493 3,273 633 1,618 6,017 1,616 1,255 54 1,778 4,703
IMF 0 3,050 0 852 3,902 1,199 1,199 0 1,132 3,530
IDA/IBRD/IDB 0 0 485 224 709 266 56 54 176 552
ADB 493 100 96 542 1,231 151 0 0 470 621
Saudi Loan 0 123 52 0 175 0 0 0 0 0
Project & food loans 222 187 162 270 841 201 257 178 426 1,062
Short-term including
0 601 88 45 734 0 0 321 248 569
IDB
Private un-guaranteed 145 409 313 197 1,064 155 92 29 194 470
Privatization proceeds 0 0 0 0 0 0 0 0 0 0
Official grants 100 59 129 350 638 46 186 245 296 773
Other receipts 1,388 1,591 2,576 1,348 6,903 2,924 1,919 745 1,474 7,062
Outflows 15,762 12,997 10,886 11,145 50,790 11,299 12,141 11,528 13,482 48,450
Imports of goods 10,229 8,077 6,276 7,165 31,747 7,429 7,656 7,367 8,603 31,055
Imports of services 2,392 2,021 1,389 1,685 7,487 1,556 1,852 1,603 1,814 6,825
Interest payments 440 656 382 435 1,913 268 441 351 391 1,451
Amortization of official loans 561 331 303 405 1,600 352 371 476 408 1,607
Profit and dividends 480 481 332 404 1,697 183 251 180 355 969
Purchase of crude oil /Gas 415 421 436 397 1,669 331 337 345 376 1,389
Principal repaid on private
112 103 131 116 462 137 88 99 112 436
loans
Foreign exchange liabilities
265 544 55 100 964 183 701 5 300 1,189
liquidated
Other Payments 868 363 1,582 438 3,251 860 444 1,102 1,123 3,529
Gross reserves at end of
7,975 9,718 10,381 12,038 12,038 14,301 14,543 13,736 15,340 15,340
period
CRR 832 727 745 728 728 779 808 845 841 841
Foreign currency cash
286 434 575 419 419 548 781 108 154 154
holding
Sinking fund 304 64 0 0 0 0 0 0 0 0
Net reserves of SBP 5,150 7,042 7,708 9,529 9,529 11,761 12,055 11,188 13,112 13,112
DMB reserves without
sinking fund & includes 2,521 2,612 2,673 2,509 2,509 2,540 2,488 2,548 2,228 2,228
CRR
*Provisional

150
 Balance of Payments

during Q2 and Q3 of FY10. In Q4-FY10, Pakistan again received around US$ 2 billion on account of
the logistic support and 4th tranche of the IMF program loan, which pushed the reserves to record
peak of US$ 16.9 billion. For detail of inflows and outflows during the year (see Table 7.13)

As against the SBP reserves, commercial

Figure 7.31: Foreign Currency Deposits and Trade Financing
bank’s reserves increased by US$ 0.46 billion
FC deposits Trade financing (RHS)
during FY10 against slight decrease of US$ 4.5 750
0.12 million in the previous year (see Figure
7.30). Commercial banks’ reserves benefited 4.4 700
from record US$ 8.9 billion inflow of
4.3 650

billion US$

billion US$
remittances and fall in loans against FE25
deposits. These helped commercial banks’ 4.2 600
cope with over US$ 10.0 billion worth of oil
4.1 550
imports during FY10.16
4 500
The expectations of depreciation of the
3.9 450
domestic currency in H1-FY10 following the

Nov-09

May-10
Mar-10
Sep-09

Feb-10
Jan-10
Aug-09
Jul-09

Apr-10

Jun-10
Dec-09
Oct-09
announcement of the schedule of withdrawal
of the oil support led not only to increase in
the foreign currency deposits but also slowed
down the conversion of foreign currency deposits to rupees (see Figure 7.31). It appears that along
with individuals some corporate also favored holding foreign currency accounts as evident from the
rise in the foreign currency deposits of OGDC, KESC, Pak Arab Refinery, BP Pakistan, and UN
mission etc during this period.

Expectations of depreciation also led to the retirement of the foreign currency loans, which were
already depressed on account of fall in
Figure 7.32: Interest Rate Differential & Depreciation
interest rate differential between EFS and Interest rate differential Depreciation (RHS)
foreign currency loans (see Figure 7.32). This 4.7 1.5
is also evident from the rise in borrowings
under EFS. The combined impact of the 3.9 0.8
increase in the deposits and retirement of
foreign currency lending supported
percent

percent
3.2 0.0
commercial banks’ reserves during H1-
FY10.However, as these factors subsided,
some deterioration in the commercial banks’ 2.4 -0.8
reserves was recorded in the latter half of
FY10. All in all inter-bank market has 1.6 -1.5
exhibited reasonable maturity given that
May-10
Nov-09

Apr-10

Jun-10
Dec-09
Oct-09

Mar-10
Sep-09

Feb-10
Jan-10
Aug-09
Jul-09

shifting of oil payments to it went quite

smoothly without causing any disruptions.

Reserve Adequacy
During FY10 Pakistan’s reserves adequacy improved both, when measured in terms of weeks of
imports and as a ratio of short-term debt and liabilities. The improvement was more pronounced in the
H1-FY10 as fall in trade deficit and improvement in the reserves pushed up reserves in terms of
number of weeks of imports from 21.1 weeks as of end June FY09 to 29 weeks as of end Dec FY10.
However, in the latter half of FY10 imports started to grow once again and accumulation in reserves
slowed. When measured as a ratio of short-term debt and liabilities, reserves adequacy improved from

16
As per exchange record (SBP) data
151
State Bank of Pakistan Annual Report for 2009-2010

6.0 percent as of end June FY09 to 7.8 percent in FY10 this decline was primarily due to rise in the
reserves in FY10 as short-term debt and liabilities increased only by US$ 16.0 million during the year.

7.5 Exchange Rate

During FY10 Pakistan’s exchange rate vis a
vis US dollar remained relatively stable and Figure 7.33: Exchange Rate
FY09 FY10
rupee depreciated by 4.8 percent during the 86
year against 15.7 percent depreciation
recorded in the previous year (see Figure
7.33). 82

pak Rs/US$
Although relative stability of the rupee
78
despite reduced market support from SBP is
remarkable, gradual depreciation of the rupee
does indicate persistent pressures in the 74
foreign exchange market throughout the year.
70
At the beginning of the year, rupee came

Aug
Jul

Mar

May
Sep

Feb
Jan

Apr
Oct
Nov
Dec

Jun
under pressure due to expectations of possible
shortage of US dollars due to shifting of the
oil payments, however, as news on the economic front were good and country was getting inflows
these expectations of depreciation soon died out.

In December, rupee again came under pressure as demand for the US dollars increased to cover Hajj
related expenses and SBP shifted remaining of the oil payments. In Jan-Feb rupee yet again faced
renewed speculative pressures, which were very sever causing kerb premium to touch almost to Rs.
2.0 (see Figure 7.34). Pressures on the rupee during Dec-Jan were also strong probably due to rise in
the trade deficit, slowdown in remittance due to disruption in economic activity following Ashura
bomb blasts etc. Severity of the pressures on the rupee can be gauged from the fact that out of 4.8
percent depreciation around 3.2 percent
depreciation was recorded in Dec-Jan. Rupee Figure 7.34: Kerb Market Premium
however, regained some of its lost ground in 2.0
Feb-Mar before slipping again.
With SBP no more intervening in the forex 1.5
market to support oil payments, the exchange
1.0
rate of the country has become more
Rs

representative of demand and supply

0.5
conditions in the forex market. This is likely
to be helpful in resolving external account
0.0
imbalances in the future as exchange rate
flexibility provides an adjustment mechanism
-0.5
that can reduce excesses in the external
2-Mar-10
2-Sep-09

2-Feb-10
2-Jan-10
2-Aug-09

2-Nov-09

2-Jun-10
2-Dec-09
2-Oct-09

2-May-10
2-Jul-09

2-Apr-10

accounts.

Rupee’s performance against other major

currencies during FY10 basically reflected the
performance of these currencies in the international market. Euro and Pound exhibited weakness
primarily due to the poor performance of their respective economies, while weakness in US economy
lent support to Japanese Yen.

152
 Balance of Payments

Slow growth, unemployment, and high budget Figure 7.35: Movement of Pak Rupee Vs Major Currencies
deficit plagued the UK economy during FY10 EURO GBP JPY
causing the pound sterling to weaken. In the 13
Euro area, in addition to the slow economic
recovery the area was hit by threat of default 7
by the Portugal, Ireland, Greece and Spain
(PIGS). The flight to safety resulted in fall in

percent
the demand for Euros. These factors caused 0

rupee to appreciate against both, the pound

and Euro. Pak rupee appreciated 5.2 percent -7
against the pound and 10.1 percent against
euro.
-13

Nov-09

Apr-10

Jun-10
Dec-09
Oct-09

May-10
Mar-10
Sep-09

Feb-10
Jan-10
Aug-09
Jul-09
In contrast to pound and the Euro, Japanese
yen strengthened in the international market
during FY10. As the prospects of sustained
recovery in the US economy faded, and FRB Figure 7.36: Change in RPI, NEER and REER
announced continuation of the easy monetary RPI NEER REER
policy, Investment in the US securities 14
became unattractive and investors instead
opted for carry trade for which Japanese yen
7
which is available at almost zero markup is
ideally suited. The increased demand for the
Japanese currency appreciated yen against the 0
US dollar and consequently rupee depreciated
against the yen by 12 percent during the year
(see Figure 7.35). The appreciation of the -7
rupee against the euro and the pound could
have negative consequences for country’s
exports not only by making them costlier in -14

countries of these currencies but also by FY09 FY10

contributing to the appreciation of the real

effective exchange rate. Indeed, despite Table 7.14: Summary of Trade Account

depreciation against the dollar and the yen, FY07 FY08 FY09 FY10
Pakistan’s currency appreciated by 8.3 percent in Absolute value (billion US Dollar)
real terms during FY10 against 0.3 percent Trade deficit 13.6 20.9 17.1 15.3
depreciation recorded in the previous year. Exports 17.0 19.1 17.7 19.3
Imports 30.5 40.0 34.8 34.7
Real Effective Exchange Rates As percent of GDP
As can be seen from the (see Figure 7.36), Trade deficit 9.5 12.8 10.6 8.7
Pakistan’s nominal effective exchange rate Exports 11.9 11.6 10.9 11.0
depreciated by just 2.1 percent during FY10 Imports 21.4 24.4 21.5 19.7
against 12.0 percent in FY09 this more than YoY growth
compensated the lower rise in the relative price Trade deficit 11.8 54.2 -18.1 -10.3
index compared to previous year thus resulting Exports 3.2 12.2 -7.2 9.4
in significant appreciation of the real effective Imports 6.9 30.9 -12.9 -0.3
exchange rate.

153
 State Bank of Pakistan Annual Report for 2009-2010

7.6 Trade Account17

Pakistan’s trade deficit continued to narrow for Table 7.15: Components of Improvement in Trade Account
the second consecutive year, reaching US$ billion US Dollar
15.3 billion. Unlike the preceding year, in
Exports Imports
which the entire improvement in trade account
FY10 FY09 FY10 FY09
was on account of a fall in imports, in FY10 it
Price impact -0.5 -0.3 -0.4 -1.9
was the remarkable YoY growth of 9.4 percent
Quantum impact 1.4 -0.7 0.7 -0.9
in exports that led to 10.3 percent YoY
Others 0.8 -0.4 -0.4 -2.3
contraction in the trade deficit. As a result,
Total change 1.7 -1.4 -0.1 -5.1
trade deficit to GDP improved to 8.7 percent in
FY10 from 10.6 percent in FY09 (see Table
7.14). Furthermore, while the increase in
exports largely owed to high quantum of primary Table 7.16: Imports Related Indicators
commodities, fall in the import bill was mainly a percent
result of lower prices (see Table 7.15). FY07 FY08 FY09 FY10P
GDP growth rate 6.8 3.7 1.2 4.1
Exports during FY10 staged a welcome recovery Industry growth rate 8.8 1.4 -1.9 4.9
in absolute terms. The main impetus to exports REER app(+)/dep(-) 0.8 -2.3 -0.3 8.3
growth came from primary commodities such as Private sector credit growth 14.7 16.5 0.7 3.9
rice, cotton, fruits and vegetables coupled with Wheat imports (million US$) 41.5 860.0 1078.6 40.8
strong performance of jewelry and chemicals & Import growth rate 6.9 30.9 -12.9 -0.3
pharmaceuticals. Exports of manufactured and
semi manufactured goods also posted positive growth on account of some revival in global demand
(see Figure 7.37).
Analysis of exports shows that entire growth in the exports was concentrated in H2-FY10, which
more than offset the fall of 3.9 percent recorded in H1-FY10 (see Figure 7.38). This growth in
exports was broadly in line with the revival in external demand and the improved domestic industrial
production 18 (see Box 7.3).

As far as import performance is concerned, on the one hand, a revival in domestic economic activity

Figure 7.37: Contribution in Exports Growth Figure 7.38: Half-Yearly Analysis of Exports
Primary commodities Semi-manufactured Manufactured 30
15
20
percent growth YoY

10
10
percentage points

5 0

0 -10

-5 -20

-30
-10
H1-FY07

H1-FY08

H1-FY09

H1-FY10
H2-FY07

H2-FY08

H2-FY09

H2-FY10
Jul-Apr
FY07

FY09
FY08

FY10

17
The discussion on this section is based on custom data provided by the Federal Bureau of Statistics (FBS) which may vary
from trade numbers compiled by the SBP.
18
LSM grew at rate of 8.3 percent YoY during Jan-May FY10, whereas marginal growth of 1.4 percent was recorded during
H1-FY10.

154
 Balance of Payments

coupled with appreciation of exchange rate in Figure 7.39: International Commodity Price Index and Import
real terms contributed to a rise in import bill Growth
International commodity price Import growth (RHS)
(see Table 7.16); on the other hand, a sharp
250 80
decline in wheat imports eased pressures on
the import bill. The relatively stable
Falling

index (2005=100)
international commodity price index during 200 40
prices
FY10 also kept in check the import bill (see

percent
Figure 7.39). 150 0

Rising prices
Persistence in improvement of the trade 100
Relatively
-40
account, however, depends on the rate at stable prices
which exports and imports grow during FY11. 50 -80
To improve the country’s export performance,

Nov-07

Nov-08

Nov-09
May-08

May-09

May-10
Mar-08

Mar-09

Mar-10
Sep-07

Sep-08

Sep-09
Jan-08

Jan-09

Jan-10
Jul-07

Jul-08

Jul-09
the need is to address issues hampering
export’s competitiveness. Various incentives
were announced in the Strategic Trade Policy
Framework in 2009-12; the continuation and implementation of these supportive measures is
imperative to boost exports. Moreover, market and product diversification is also of utmost
importance for the sustainability of exports growth.

With regard to imports, the revival in global commodity prices, possible import of a key commodity
like cotton and rise in imports for reconstruction related activities following the devastating floods,
are likely to inflate the import bill going forward.

Box 7.3: Exports Performance Amid Improved

External Demand Figure 7.3.1: Exports Performance Analysis
Pakistan exports US imports EU imports
Global trade recorded a significant contraction during 60
FY09 owing to overall economic slowdown. The
recession that hit the world’s developed countries
spilled over to the emerging countries owing to market 30
integration. The exports of many regional emerging
percent

countries including Pakistan plummeted during FY09

owing to low demand from industrialized countries like 0
US and EU. However with a gradual improvement in
external demand, exports started to recover.
-30
Monthly analysis of export performance reveals an
improvement in export growth from December 2009
which was broadly in line with the rising US and EU -60
Nov-08

Nov-09
Apr-09

Apr-10
Jun-09
Dec-08

Dec-09
Oct-08

Oct-09
May-09
Mar-09

Mar-10
Sep-08

Feb-09

Sep-09

Feb-10
Jan-09

Jan-10
Aug-08

Aug-09
Jul-08

Jul-09

imports (see Figure 7.3.1). EU agreement to increase

market access for Pakistan through the immediate and
time-limited reudction of import duties is likely to
facilitate Pakistan exporters going forward.

Revival in external demand bodes well, not only for Pakistan’s exports but exports of some of the emerging economies also
started to recover. The export performances of regional competitors show a strong improvement in FY10 compared to
subdued performance of FY09 (see Table 7.3.1). Going forward, exports of these countries are likely to rise as according to
the World Economic Outlook, global recovery has evolved better than expected and the world output is expected to rise by

Table 7.3.1: Exports Performance of Emerging Economies

(growth in percent)
China India Indonesia Malaysia Pakistan Thailand
FY09 -2.3 -9.7 -9.0 -13.3 -7.2 -6.2
FY10 5.0 18.9 16.0 8.1 9.6 9.5
more than 4.0 percent during CY10.
155
State Bank of Pakistan Annual Report for 2009-2010

7.6.1 Exports
Exports posted a remarkable growth of 9.4 Figure 7.40: Export Earnings
Target Actual exports
percent YoY during FY10, in contrast to a 7.2
percent YoY fall observed during last year. In
absolute terms, exports touched the level of FY08
US$ 19.3 billion, surpassing the target of US$
18.9 billion set for the year (see Figure 7.40).
Annual analysis of total exports indicates that FY09
exports were consistently moving upwards till
FY08, but due to global economic recession
compounded with domestic issues, exports
deteriorated in FY09. However with the FY10
improvement in external demand, exports
accelerated in FY10.
0 6 12 18 24
billion US$
Direction of Exports
The trend in market diversification that was set Table 7.17: Contribution in Export Growth
out in FY09 further gathered momentum in percentage points
FY10. As far as contribution in export growth FY06 FY07 FY09
FY10
(Jul-Apr)
is concerned, China remained at top (see Table
China 0.68 0.64 -0.67 3.12
7.17). However, the high export to China could
United Kingdom 0.34 0.47 -1.66 1
be a transient phenomenon as the growth was
Afghanistan -1.88 2.3 0.28 0.65
mainly driven by cotton-related, low-value
UAE 0.32 4.16 -4.49 0.39
added products, which resulted from low cotton
Turkey 0.52 0.27 -0.54 0.53
production in China. In case of United
USA -0.06 -2.73 -5.13 -0.24
Kingdom, exports of textile and apparel
products increased reflecting the relative Other 3.28 7.09 5.01 1.83

improvement in UK’s textile demand. Overall growth 3.2 12.2 -7.2 7.28
Regarding rising contribution of Afghanistan, Table 7.18: YoY Growth in Production and Exports of Agri-based
Commodities
exports of cement and petroleum products,
Production Export quantity Export value
mainly high speed diesel, increased. High
exports of gold jewelry contributed to a rise of Rice -3.1 47.1 9.7
UAE’s share in Pakistan’s overall exports. Cotton 5.3 104.6 124.0
Going forward, African countries are potential Mango 6.9 19.1 30.6
big markets for products like cement, Citrus 3.3 97.9 77.6
automobiles, and pharmaceutical. Potato 2.3 19.3 20.6
Grapes 1.3 50.5 114.1
Composition of Rise in Export Proceeds
The category-wise analysis of export earnings during FY10 reveals that main impetus came from agri-
based commodities such as non-basmati rice, cotton yarn, raw cotton, fruits, and vegetables.
Improved production of these commodities played an important role in YoY export growth during
FY10 (see Table 7.18). The growth in agri-based commodities was complimented well by strong
performance of jewelry, chemical & pharmaceutical and petroleum products. Readymade garments
exports also displayed a decent performance during H2-FY10 (see Table 7.19).

As in the previous year, rice was one of the key drivers of export growth during FY10. However a
comparison of both years show that unlike the preceding year in which prominent factor was the price
impact that led to overall increase in rice exports, it was the record quantum export during FY10. Had
export unit values of rice stayed at their FY09 levels, export proceeds would have been much higher
(see Table 7.20).

156
 Balance of Payments

Table 7.19: Export Growth Composition Analysis

Value: million US Dollar, growth: percent
FY10 YoY growth
Value Growth Abs ∆ Quantum impact Price impact H1-FY10 H2-FY10
Major drivers of export growth
Non-basmati rice 1317.9 44.4 405.0 662.0 -256.9 4.9 92.4
Jewelry 645.6 126.0 360.0 185.1 94.0
Cotton yarn 1417.2 27.1 302.4 231.7 70.8 30.9 23.0
Art silk and synthetic textiles 446.6 60.6 168.5 97.0 71.5 61.5 59.9
737.6 22.0 133.2 8.9 36.9
Chemicals and pharmaceuticals
Petroleum products 560.6 24.7 111.0 127.1 -16.1 -17.7 113.4
Raw cotton 195.7 124.0 108.3 91.4 16.9 127.6 114.3
Fruits 238.7 51.9 81.5 72.2 9.3 68.7 38.8
Readymade garments 1283.2 4.3 53.2 -57.5 110.7 -3.6 12.3
Other textile material 258.3 24.1 50.1 1.7 49.1
Total exports 19382.5 9.4 1694.5 1376.2 -488.9 -4.0 25.2

In terms of quantum, record 4.0 million MT rice was exported with major portion stemming from
exports of non-basmati rice. Weak rice crop in India and Philippines, extension of preferential duty to
Pakistan’s Irri-6 rice by Kenya and most importantly, better-than-targeted domestic production led to
remarkable exports of rice. In terms of market share, exports to Kenya increased probably reflecting
the benefit of extension in preferential duty. Weak rice crop in Philippines had two positive impacts
i.e. Pakistan exporters not only exported rice to Philippines but also to Singapore, which has remained
the major importer of Philippines rice. Exploration of new markets particularly African countries such
as Somalia, Niger, Nigeria, Cameroon and Uganda was another factor behind the notable performance
of rice exports. Regarding future outlook, keeping in view the state of carry-over stock and production
forecasts in Pakistan and other rice exporting countries, exports may not be as high as recorded in
FY10.

Table 7.20: Composition of Rice Exports

Impact: million US Dollar, Unit value: US$/MT
FY09 FY10
Quantum impact Price impact Unit value Quantum impact Price impact Unit value
Basmati rice 153.9 155.3 1098.6 13.1 -225.0 870.5
Other rice -38.6 107.1 520.1 662.0 -256.9 435.3

The rise in exports of fruits is attributed to both volume as well as value. The main impetus came
from mangoes, dates, kinos and edible nuts. Increased demand of mangoes and kinos from UAE,
Saudi Arabia, Germany and Russia led to an impressive growth of fruit exports.

Meat exports also rose in terms of quantum during FY10. The major contribution emerged from fresh
meat of goats. The demand from Saudi Arabia was met well by Pakistani exporters as exports to
Saudi Arabia doubled in absolute terms. High demand from Saudi Arabia is probably due to the ban
imposed by the Saudi government on meat imports from Ethiopia. Apart from goat meat, exports of
sheep meat also increased. Another development was the MoU signed between Pakistan and
Malaysia according to which Malaysian International Halal Integrity (IHI) group will assist to setup a
Halal standard board and accreditation body in Pakistan. This MoU is likely to facilitate exporters as
improved quality and authentication is likely to improve export opportunities in many untapped
markets. Going forward, meat exporters may face some difficulty due to floods that resulted in loss of
157
State Bank of Pakistan Annual Report for 2009-2010

livestock. Apart from flood impact, anecdotal

Figure 7.41: Raw Cotton Production and Export Growth
evidence suggests that smuggling of live Production Exports
animals to Iran and direct export of live 42
animals is likely to hit the downstream
industry of meat. It is important to mention 28
that government initially imposed a ban on
livestock exports in 2004; however the
14

percent
government lifted the ban in May 2009.
0
Textile Exports
Textile exports increased by 7.0 percent YoY
during FY10 in contrast to a 9.4 percent -14
decline in the same period last year. This
improvement largely emanated from the -28
global economic recovery that translated into FY06 FY07 FY08 FY09 FY10
improved textile and clothing demand from
country’s major export markets of EU and the US.19 In addition, the shortfall in cotton production in
China20, better domestic cotton crop21 during FY10 and depreciation of rupee vs. US dollars, at a time
when currencies of other competitors recorded
appreciation, also boosted country’s textile Table7.21: Currencies Movement (app/dep)
exports during FY10 (see Table 7.21). In overall percent
terms 68 percent of the total increase in textile Vs. Dollar Vs. Euro
exports was contributed by low-value added Jan-May Jan-May
2009 2009
2010 2010
categories namely, cotton yarn, raw cotton and Sri Lanka 2.83 -1.54 0.47 14.9
synthetic textiles. The rise in these categories Bangladesh 3.44 0.14 1.07 16.95
exports, which was mainly due to YoY increase China 0.25 0.14 -2.05 16.95
in export quantum, was largely a function of Pakistan -5.61 -0.25 -7.78 16.5
cotton production shortfall in China that not only India 7.14 0.37 4.68 17.23
raised the demand for raw cotton and cotton
yarn, but also for synthetic textile. The growth
observed in raw cotton exports was Figure 7.42: Cotton Yarn Export Quantum
phenomenal during the period under review. 80
This sharp rise of 124.0 percent YoY is
attributed to growth in production of raw
60
cotton (see Figure 7.41). Production of raw
cotton touched the level of 12.7 million bales
million Kg

during FY10. Apart from better domestic 40

production, low production in China proved
beneficial for the exporters. Going forward, 20
exports of raw cotton may not be as strong as
expected initially due to the recent floods.
0
Nov-09

Apr-10

Jun-10
Dec-09
Oct-09

May-10
Mar-10
Sep-09

Feb-10
Jan-10
Aug-09
Jul-09

Cotton yarn exports depicted a decent growth

of 27.1 percent YoY during FY10. However,
the increase in yarn exports led to domestic

19
The anecdotal evidence suggests that in addition to fulfilling retail demand, concerns for depleting inventories among
foreign buyers also had a significant contribution in improving textile and clothing exports to these destinations.
20
In FY10, cotton production in China declined by 14.4 percent YoY.
21
Cotton production increased from 12.06 million bales to 12. 70 million bales during FY10.
158
 Balance of Payments

shortages forcing up prices. 22 This led the

Figure 7.43: Export Quantum and Price of Towel
government to cap cotton yarn exports in Quantum Unit value (RHS)
order to ensure availability of yarn at stable 24 5000
prices in the local market as well. As a result
of this measure, exports of yarn started falling
from January 2010 onwards. The government

US$/MT
decision to impose a 15 percent regulatory

000MT
duty on yarn exports in May 2010 which 17 3000

decelerated the exports of yarn (see Figure

7.42).

Exports of high value added categories 10 1000

displayed a mixed scenario in terms of price

May-09

May-10
Nov-08

Nov-09
Apr-09

Apr-10
Jun-09

Jun-10
Dec-08

Dec-09
Oct-08

Oct-09
Mar-09

Mar-10
Sep-08

Feb-09

Sep-09

Feb-10
Jan-09

Jan-10
Aug-08

Aug-09
Jul-08

Jul-09
and quantum increase (see Table 7.22). The
moderate YoY increases in knitwear and
ready-made garments exports were an
Table 7.22: Major Textile Exports Price & Quantum Impact
million US Dollar

FY09 FY10
Due to Due to
Absolute ∆ Quantum Price Absolute ∆ Quantum Price
Textile group -998.8 671.6
Of which
Raw cotton 17.2 28.0 -10.7 108.3 91.4 16.9
Cotton yarn -186.2 -72.9 -113.3 302.4 231.7 70.8
Cotton fabrics -55.3 -134.9 79.6 -136.7 -149.8 13.1
Knitwear -91.1 126.1 -217.2 20.3 -49.7 69.9
Bed wear -168.4 -37.8 -130.6 -11.1 -4.9 -6.1
Towels 29.8 78.4 -48.5 33.2 124.0 -90.8
Readymade garments -262.6 -420.0 157.3 53.2 -57.5 110.7
Art silk and synthetic textiles -0.1 -0.1 0.0 168.5 97.0 71.5

outcome of increases in export prices. Reportedly, the producers of these categories were forced to
raise export unit prices due to rising domestic cost of production led by sharp increases in the
domestic cotton yarn prices and rising power tariffs (see Table 7.23)

Foreign buyers of these categories were reluctant Table 7.23: Cost of Production
in accepting these prices; however, the rising FY09 FY10
cost of production in China and Bangladesh Cotton yarn index 109.5 119.8
reduced the competitiveness of other competitors Electricity ind. supply tariff index 141.4 173.4
also. This scenario in the presence of recovering Unit value (US$/Doz)
demand from the major markets augurs well for Readymade garments 42.2 46.5
country’s clothing exports. Knitwear 15.7 16.7

The performance of towel exports presented an altogether different scenario. The 5.2 percent YoY
increase in this category was recorded on the back of strong quantum surge, while its export unit
values recorded fall during this period (see Figure 7.43). Most of this increase was contributed by

22
The average price index of cotton yarn during FY10 was 138.3 as compared with average cotton yarn index of 104.2 in
FY09
159
State Bank of Pakistan Annual Report for 2009-2010

rising demand from the US market23 (see Figure 7.44: Recovery in Textile and Apparel Imports
Table 7.24). Further, Pakistan’s towel US EU (RHS)
9 9
manufactures are in a better competitive
position; since towel exported by Pakistan
generally use 16- count coarse yarn, in the 8
production of which Pakistan has strong edge. 8

billion US$

billion €
Another development was the reported
7
closures of towel industry in the EU, which
resulted in a shift of demand for this product 7
to China, India and Pakistan. 6

Bed wear exports recorded a marginal 0.6 6 5

percent YoY fall during FY10. This was due

Nov 09

Dec 09
Oct 09
Sep 09

Feb 10

Mar 10
Jan 10
Aug 09
Jul 09
to reported slow recovery in demand for this
category from both the EU and the US
market. However, from Q1-CY10 demand
for this category has started to improve in the US market. Bed wear exports are classified into printed

Table 7.24: US Market Towel Import Analysis

percent
CY2009 Q1-CY10
YoY Growth Share UV (World=100) YoY Growth Share UV (World=100)
India -2.85 30.4 118 10.37 30.2 126
China 1.88 22.6 141 8.8 29.08 130
Pakistan -6.55 22.5 64 36.4 21.1 62

and non-printed types. Pakistan’s performance remained well in the non-printed segment both in the
US and the EU markets during FY10. It is important to note, however, that Pakistan is a producer of
low-end products in this category24 and faced tough competition from China in the US market for
low-end products in CY2009. However, the situation changed in Q1-CY10, where demand for this
category most probably shifted towards Pakistan (see Table 7.25). Reportedly China is gradually
moving out from the low-end home textile segment, leaving room for Pakistan. In the EU market, the
demand for home textile was shrinking during CY 2009, however, Pakistan’s exports performed
better, because of the positive impact of the removal of antidumping duties. In overall terms the
recovery in demand is likely to cause an expansion in Pakistan’s bed wear exports going forward.
Table 7.25: Bed Wear Export Market Analysis
percent

US Market EU Market
Printed Non-printed Printed Non-printed
value change Shares value change Shares value change
CY 2009 Q1-CY10 Q1-CY10 CY 2009 Q1-CY10 Q1-CY10 CY 2009 CY 2009
India -9.3 41.7 5.5 -44.5 46.3 25 -9.6 13.3
China 6.4 38.8 32.3 -35.8 14.3 34.6 5.7 0.5
Pakistan -26.5 -12.5 51.2 56.8 8 26.9 1.2 10.3
World -13.4 4.3 100 -24.1 22.4 100 -1.1 -1.9

23
The towels exports to the US recorded 8 percent YoY rise to the US during Jul-Feb FY10.
24
The unit values for non-printed type were 211/unit for India, whereas this was 98/unit for China and 87/Unit for Pakistan
during Q1-CY10.
160
 Balance of Payments

International Comparison of Textile & Apparel Exports

The textile imports of US and EU started recovering from December 2009 onwards after decelerating
during initial months of FY10 (see Figure 7.44). The recovery in imports of these countries is
welcomed by the major exporters of textile and apparel products. The performance of Pakistan’s low
value products as well as apparel exports has improved in Q3-FY10. The exports of most of the
competitors also showed signs of improvement in Q3-FY10 as compared with Q2-FY10 (see Table
7.26). It is important to note that the recovery of export demand was stronger in the US market as
compared to the EU market, as economic conditions have not stabilized in the latter destination so far.
Going forward, the imports of US and EU are
likely to increase however there a risk of a Figure 7.45: Contribution in Chemicals & Pharmaceutical Exports
possible slowdown of demand in these Fertilizer manufactured Plastic material
Pharmaceutical products Other chemicals
developed countries is still present. 60

Chemicals & Pharmaceutical exports posted

40
a growth of 22.0 percent YoY during FY10

percentage points
with contributions coming from all the sub-
sectors of chemical and pharmaceutical (see 20
Figure 7.45). Export earnings from
pharmaceutical products grew by 38.7 percent 0
YoY during FY10. The surge in
pharmaceutical exports is attributed to
-20
geographical diversification of markets along
FY07

FY08

FY09

FY10
with supportive incentives provided by
government of Pakistan and SBP. 25 In case of
Table 7.26: Textile & Apparel Export Performance (Imports to EU and US)
International Comparison
percent

Textile Apparel
USA FY09 Q1-FY10 Q2-FY10 Q3-FY10 FY09 Q1-FY10 Q2-FY10 Q3-FY10
Bangladesh 18.19 24.64 1.85 -0.62 10.8 -11.72 -11.79 -6.05
China -9.07 -17.15 -1.8 13.92 2.03 -14.38 2.1 13.66
India -10.4 -16.59 -7.21 15.59 -6.98 -2.85 -11.48 -2.13
Pakistan -5.79 -3.23 -13.13 4.31 -6.2 -11.3 -16.53 -0.38
Sri Lanka -21.65 -6.59 -3.36 -6.53 -7.94 -25.3 -26.3 -8.6
World -9.89 -18.11 -6.45 12.02 -5.21 -19.62 -9.66 2.29
EU FY09 Q1-FY10 Q2-FY10 Q3-FY10 FY09 Q1-FY10 Q2-FY10 Q3-FY10
Bangladesh 0.71 -13.74 -10.59 -6.73 13.16 7.52 -13.95 -14.07
China -3.26 -13.85 -12.46 8.78 16.51 -3.12 -16.17 -9.17
India -12.66 -18.89 -14.66 0.32 5.31 5.63 -3.08 -9.67
Pakistan -6.33 -8.87 -7.94 2.27 4.21 -5.28 -11.82 -11.16
Vietnam -3.83 4.39 2.99 18.58 4.68 -3.38 -17 -7.74
World -10.25 -12.13 -9.79 7.58 3.99 -1.55 -12.23 -8.85

other chemicals and plastic material, import demand from India for chemicals like polyethylene and
pure terepthalic acid (PTA) led to high exports. On the other hand, exports of Polyethylene
terephthalate (PET) to France, Sweden and Poland slowed down as the local plastic industry of EU
claimed that imports of certain PET, coming from Pakistan, Iran and UAE are being dumped. State

25
In the Strategic Trade Policy Framework 2009-12, the government announced to zero rate pharmaceutical exports. State
Bank of Pakistan also provided Long Term Financing Facility to this sector.
161
State Bank of Pakistan Annual Report for 2009-2010

Bank of Pakistan also included Polyethylene terephthalate in the negative list of Export Finance
Scheme (EFS)26, which is likely to hurt the exports going forward.

Jewelry exports recorded a phenomenal growth of 123.4 percent YoY during FY10. This surge in
exports is attributed to a sharp rise in gold prices and high demand from US and UAE. Exemption of
sales tax on imports and local supply of platinum, diamonds, palladium and precious stones also
induced bullish sentiments. The role of Pakistan Gems and Jewelry Development Company remained
instrumental in promotion and marketing of jewelry products. Category-wise analysis of jewelry
shows exports of gold jewelry in particular rose remarkably. It is important to mention that to export
gold jewelry, minimum value addition on imported gold is necessary. 27 Anecdotal evidence suggests
that a substantial part of gold is being smuggled from Iran and is being exported to UAE.

Cement export in terms of quantum continued

to grow for the fifth consecutive year (see Figure 7.46: Cement Export Quantum
12000
Figure 7.46). High external demand,
exploration of new markets and increase in
domestic production provided impetus to 9000
exporters. The government on its part also
allowed inland freight subsidy in order to
000 MT

foster cement exports. As far as domestic 6000

production is concerned, it increased by 10.0
percent during Jul-Apr FY10 as compared
with a growth of 5.0 percent in Jul-Apr FY09. 3000
Exports to usual markets such as Afghanistan,
Bahrain, Egypt and Iraq increased. Along
with the rising share of these traditional 0
markets, exploration of new markets FY06 FY07 FY08 FY09 FY10
especially South Africa, Somalia, Sri Lanka
and Sudan bode well for the exporters. An interesting development was the declining share of United
Arab Emirates in country’s cement exports. This decline is probably attributed to low demand in UAE
or may be due to the fact that Saudi authorities lifted ban on cement exports. Saudi Arabia, due to its
geographical position, can capture Pakistan’s share in Middle Eastern countries going forward.

26
SMEFD Circular Letter No. 09 of 2010, dated 28 June 2010
27
S.R.O 266(I)/2001 dated 7th may 2001, Ministry of Commerce according to which, 4.0 percent on plain gold bangles and
chains, 6.0 percent on other plain jewelry and 9.0 on studded or embedded jewelry value addition in imported gold is
imperative.

162
 Balance of Payments

7.6.2 Imports
Import recorded a marginal decline of 0.3 Figure 7.47: Group-wise Contribution in Import Growth
percent YoY during FY10 as compared with a Food Machinery
Transport Petroleum
sharp fall of 12.9 percent during the same Textile Agricultural & chemical
period last year. Composition of this fall in Metal Other
32
import shows that the decline in imports of
food, machinery and metal group offset the

percentage points
positive growth of petroleum, transport,
16
textile and agricultural & chemical groups
(see Figure 7.47 & Table 7.27).
0
It is important to note that although the
overall quantum impact turned positive in
FY10, it was the negative price impact that
-16
kept the overall import growth in the negative
territory.28 FY07 FY08 FY09 FY10

Table 7.27: Import Growth Composition Analysis

Value in million US Dollar, growth in percent

Growth Abs ∆ Quantum impact Price impact

FY09 FY10 FY10

Major commodities recording increase
of which
Petroleum products 5513.8 6916.5 25.4 1402.7 1405.6 -2.9
Air craft’s, ships and boats 489.2 654.4 33.8 165.2 --- ---
Road motor vehicles 923.5 1209.1 30.9 285.6 --- ---
Medicinal products 570.8 717.2 25.7 146.4 149.4 -2.9
Fertilizer manufactured 548.0 906.0 65.3 358.1 537.0 -178.9
Major commodities recording fall
of which
Wheat un-milled 1078.6 40.8 -96.2 -1037.8 -1043.8 6.0
Petroleum crude 3994.2 3172.4 -20.6 -821.9 -789.0 -32.9
Other machinery 2261.8 1608.9 -28.9 -652.8 --- ---
Telecom 961.3 759.3 -21.0 -202.0 --- ---
Iron and steel 1405.4 1293.3 -8.0 -112.1 -110.2 -1.9
Others 17075.5 17432.2 2.1 356.6 - -
Total imports 34822.0 34710.0 -0.3 -112.1 - -

Major Commodities Recording Increase

Petroleum products posted a growth of 25.4 percent during FY10. Liquidity issues prevailing in the
petroleum industry forced the refineries to operate at low utilization rate. This directly caused a
decline in imports of crude oil. Falling import quantum of crude led to increased import demand of
petroleum products amid rising domestic demand. Disaggregated analysis of petroleum products
indicates that domestic production of all the main products such as high speed diesel (HSD), furnace
oil (FO) and MOGAS (MS) declined during FY10. Due to major fall in domestic production of
these categories, the import quantum increased in FY10 (see Table 7.28).

Quantum impact for FY10 remained 662 million US$ while price impact remained -395 million US$. The impact of
commodities(whose quantum is not available) was -379 million US$
163
State Bank of Pakistan Annual Report for 2009-2010

Table 7.28: Analysis of Petroleum Products

Production Imports
Product 000 MT Absolute change 000 MT Absolute change
FY09 FY10 FY09 FY10 FY09 FY10 FY09 FY10
HSD 3260.6 3136.2 -301.7 -124.4 4286.6 4481.4 21.6 194.8
FO 3080.2 2484.0 -234.9 -596.2 5064.5 6729.0 1128.2 1664.4
MOGAS 1288.2 1337.5 -53.3 49.4 249.2 625.0 121.8 375.8

Shortage/load shedding of gas, narrowing of the price differential between CNG and motor spirit, and
rising sales of automobiles led to high demand of motor spirit. The import demand of furnace oil
further accelerated in FY10. The demand for furnace oil emanated from the power generating sector.
If the refineries continue to operate at low capacity utilization rates, then import demand for
petroleum products is likely to persist going forward.

The increase in imports of aircrafts, ships and boats is mainly attributed to the import of a
submersible drilling platform worth US$ 202.0 million during the month of January. Demand of ship
breaking vessels also increased by the ship
Figure 7.48: Imports of Road Motor Vehicles and Cell Phones
breaking industry as evident by the fact that Road motor vehicles Cell phones (RHS)
the number of vessels for ship breaking 140 40
purpose increased from 42 to 100 during the
first nine months of FY10. 122 32
million US$

million US$
As far as import of road motor vehicles is 104 24
concerned, main impetus came from imports
86 16
of CKDs/SKDs of motor cars and motor
bikes. This increased import is attributed to 68 8
strong domestic demand. Not only the
production of motor cars and bikes soared but 50 0
domestic sales also improved during the
May-09

May-10
Mar-10
Mar-09
Sep-08

Feb-09

Sep-09

Feb-10
Jan-09

Jan-10
Aug-08

Nov-08

Aug-09

Nov-09
Jul-08

Jul-09
Apr-09

Apr-10
Jun-09

Jun-10
Dec-08

Dec-09
Oct-08

Oct-09

period under review. Introduction of new

models also led to high sales during FY10.
Anecdotal evidence suggests that the growth
in sales of automobiles is remarkable given the
fact the most of the cars were purchased on cash Table 7.29: Fertilizer Demand Supply Situation
as consumer financing remained relatively Actual figures during FY10 (000 MT)
unchanged as compared to last year. This sharp Off take Production Imports
rise in car production also resulted in high Urea 5,152 1,526 6,545
imports of rubbers and tyres tubes. However DAP 626 959 1,535
with the tightening of monetary stance from the Abs. increase during FY10 (000 MT)
start of FY11, demand for consumer goods may Off take Production Imports
lose some momentum and imports of road motor Urea 788 232 586
vehicles may witness a slowdown in the near DAP 445 63 701
future. Introduction of new cell phones, revival YoY growth during FY10 (percent)
in consumer demand and relaxation in import Off take Production Imports
duties29 resulted in high imports of cell phones Urea 4.7 62.3 13.7
during FY10 (see Figure 7.48). DAP 11.2 270.5 40.8

29
50 percent reduction in sim activation charges and reduction of custom duty from Rs. 500/set to Rs. 200/set.
164
 Balance of Payments

Fertilizer imports recorded a rise of 65.0 percent YoY mainly on account of increased quantum
impact. Record off take due to strong performance of agri-commodities led to high imports of both
urea and DAP during the period under review. It is pertinent to mention that despite the increase in
domestic production, imports were made in order to cater the soaring domestic demand (see Table
7.29).

Another important factor behind high imports of DAP was the international price movement of DAP.
Monthly analysis of DAP import quantum and international prices shows that the fall in DAP prices
during FY10 compelled the importers to buy more quantum in order to take advantage of low import
prices (see Figure 7.49)

Going forward, reliance on imported supplies is likely to slow down as functioning of two new plants
is likely to increase the domestic capacity.

Sharp increase of 429.9 percent YoY was

observed in imports of sugar mainly due to Figure 7.49: DAP Import Quantum and International Prices
low production during FY10. The government Import quantum DAP price (RHS)
in order to bridge the demand-supply gap 250000 1200

imported sugar in large quantity. 30It is

200000 1000
important to mention that in case of sugar,
higher import unit prices also inflated the

US$/MT
150000 800
import bill. The average unit price during
MT

FY10 was 590.0 US$/MT in contrast to 100000 600

average unit price of 447.0 US$/MT during
the preceding year. 50000 400

0 200
Improved performance of high value added
May-09

May-10
Mar-09

Mar-10
Sep-08

Feb-09

Sep-09

Feb-10
Jan-09

Jan-10
Aug-08

Nov-08

Aug-09

Nov-09
Jul-08

Jul-09
Apr-09

Apr-10
Jun-09

Jun-10
Dec-08

Dec-09
Oct-08

sector as evident from the revival in exports Oct-09

resulted in demand for textile machinery. It is
important to mention that demand of textile
machinery remained subdued during FY09 Figure 7.50: Textile Machinery Imports
from both the low value and high value 50
producers. However, with better external
demand and improved performance of 40
domestic textile industry, demand started to Elimination of
million US$

increase from spinning as well as downstream 30 import duty

industry in FY10. Resultantly, imports of
textile machinery rose by 40.4 percent in 20
FY10. It is important to mention that major
categories of textile machinery were imported 10
from China; however few categories were
imported from European countries as well. 0
The supportive measures announced by the
Nov-08

Nov-09
Apr-09

Apr-10
Jun-09

Jun-10
Dec-08

Dec-09
Oct-08

Oct-09
May-09

May-10
Mar-09

Mar-10
Sep-08

Feb-09

Sep-09

Feb-10
Jan-09

Jan-10
Aug-08

Aug-09
Jul-08

Jul-09

government and State Bank of Pakistan31 also

facilitated the importers. Monthly analysis
indicates that after the removal of import duty

30
Average consumption of sugar is estimated to be around 3.8 million MT per year, whereas production during FY10 is 2.8
million MT. Keeping this in view, the government announced 1.0 million MT imports of sugar in order to bridge the
demand-supply gap during FY10. So far only 0.5 million MT sugar has been imported
31
SMEFD Circular Letter No. 03 of 2010, according to which import of second hand shall be eligible for refinancing under
the Long Term Financing Facility.
165
State Bank of Pakistan Annual Report for 2009-2010

in September 2009, imports of textile machinery started to accelerate (see Figure 7.50).

Major Commodities Recording Fall

In terms of fall, major fall came in imports of wheat, crude oil, power generating machinery, telecom
and iron & steel.

The fall in crude oil imports is attributed to both falling quantum and price impact. However,
quantum impact is more prominent. Going forward, if the refineries still work at the utilization rates
they were operating during FY1032 quantum of imported crude is likely to remain low.

In case of other machinery, the drop of 28.9 percent is mainly explained by the decline in imports of
oil refining machinery.33 This decline was inevitable as refineries were working at low utilization rates
and they were importing products rather than importing crude. As far as import of power generating
machinery is concerned, piled up inventories by the importers in the previous year coupled with
subdued demand from household sector due to usage of second hand generators also contributed to
falling import growth.

Unlike the preceding year, in which share of imported wheat was around US$ 1.0 billion, wheat
imports plummeted during FY10 amid better domestic production although, the target set for FY10
could not be attained.

The fall in telecom imports is solely explained by the YoY fall of 43.7 percent in imports of apparatus
which more than offset the increase in imports of cell phones. Falling foreign direct investment (FDI)
resulted in low imports of apparatus.

The decline in imports of iron and steel is probably due to the fact that construction activities
remained relatively lower as compared to last year. Going forward, reconstruction activities after the
recent floods may lead to high imports of iron and steel.

Palm oil imports also observed a YoY fall of 5.7 percent on account of falling quantum and import
prices. In terms of category, imports of crude palm oil declined whereas imports palm olein (refined
form of palm) increased. Going forward, importers of crude palm oil are likely to take advantage of
the reduction in duty on crude palm oil34. Anecdotal evidence suggests that import quantum of palm
oil is likely to increase amid high demand and low level of inventories.

32
POL industry was operating at 75 capacity utilization rate during FY10
33
Number of imported oil refining machines in Jul-Mar FY10 are 353 as compared with 2087 machines imported during the
same period last year.
34
Duty on crude palm oil is being reduced to Rs. 8,000/MT from Rs. 9,000/MT.
166