Saturday, September 12, 2020

Thirlwall Law: Why Hasn't Pakistan's GDP Grown Faster Than 5% Average Since 1960s?

Pakistan's economy has grown at a compounded annual growth rate (CAGR) of about 5% since the 1960s. While Pakistan's average 5% annual economic growth rate is faster than the global average, it falls significantly short of its peer group in Asia. The key reason is that, unlike Pakistan's, the East Asian nation's growth has been fueled by rapid rise in exports. History shows that Pakistan has run into balance of payments (BOP) crises whenever its growth has accelerated above 5%. These crises have forced Pakistan to seek IMF bailouts 13 times in its 73 year history. Pakistan's current account deficits would be a lot worse without 23X growth in remittances from overseas Pakistanis since year 2000.  What Pakistan has experienced is BOP-constrained growth as explained in 1979 by Thirlwall Law, a law of economics named after British economist Anthony Philip Thirlwall.  Another reason why Pakistan has lagged its Asian peers in terms of economic growth is its lower savings and investment rates. Every time Pakistan has faced a balance of payments crisis, the result has been massive currency devaluation, high inflation and slower growth for a period pf multiple years. This is is exactly what Pakistan's current government led by Prime Minister Imran Khan is dealing with right now.  This pain is the result of years of flat exports, soaring imports and excessive debt taken on during former Prime Minister Nawaz Sharif's PMLN government from 2013 to 2018. The best way for Pakistan to accelerate its growth beyond 5% is to boost its exports by investing in export-oriented industries, and by incentivizing higher savings and investments. 

History of Pakistan's IMF Bailouts

Economic Growth Since 1960: 

The World Bank report released in June, 2018 shows that Pakistan's GDP has grown from $3.7 billion in 1960 to $305 billion in 2017, or 82.4 times. In the same period,  India's GDP grew from $37 billion in 1960 to $2,597 billion in 2017 or 71.15 times. Both South Asian nations have outpaced the world GDP growth of 60 times from 1960 to 2017.

While Pakistan's GDP growth of 82X from 1960 to 2017 is faster than India's 71X and it appears impressive, it pales in comparison to Malaysia's 157X, China's 205X and South Korea's 382X during the same period.


Thrilwall's Model: 

Thrilwall's BOP-constrained growth model says that no country can sustain long-term growth rates faster than the rate consistent with its current account balance, unless it can finance its growing deficits. Indeed, if imports grow faster than exports, the current account deficit has to be financed by borrowing from abroad, i.e., by the growth of capital inflows. But this cannot continue indefinitely. Here's how Jesus Felipe, J. S. L. McCombie, and Kaukab Naqvi describe it in their May 2009 paper titled "Is Pakistan’s Growth Rate Balance-of-Payments Constrained? Policies and Implications for Development and Growth"  published by Asian Development Bank: 

"The reason is straightforward. If the growth of financial flows is greater than the growth of GDP, then the net overseas debt to GDP ratio will rise inextricably. There is a limit to the size of this ratio before international financial markets become distinctly nervous about the risk of private and, especially in less developed countries, public default. If much of the borrowing is short-term, then there is danger of capital flight, precipitating the collapse of the exchange rate. Not only will this cause capital loses in terms of foreign currency (notably United States [US] dollars) of domestic assets owned by foreigners (the lenders), but it will also cause severe domestic liquidity problems. This is especially true of many developing countries as overseas borrowing by banks and firms is predominantly denominated in a foreign currency, normally US dollars. As the exchange rate plummets, so domestic firms have difficulty finding domestic funds to finance their debt and day-today operations, often with disastrous consequences."

Investment as Percentage of GDP Source: State Bank of Pakistan 


Pakistan's Rising Current Account Deficit:

Pakistan's external debt has been rising rapidly in recent years to fund its ballooning twin deficits of domestic budget and external accounts. It pushed the external debt service cost to $12 billion in fiscal 2019-20, and added to the trade deficit of nearly $24 billion. Remittances of $21 billion from Pakistani diaspora reduced the current account deficit to $11 billion, but still forced the new PTI government to seek yet another IMF bailout with its stringent conditions to control both fiscal and current account deficits. These conditions resulted in dramatic slow-down in the country's GDP growth. 

Pakistan's External Debt. Source: Wall Street Journal


Pakistan's Exports: 

Pakistan’s exports have continued to lag behind that of its South Asian competitors since the early 1990s. Bangladesh’s exports have increased by 6.2 times compared to Pakistan’s, measured in terms of exports per capita, and that of India by 6.8 times, according to Princeton's Pakistani-American economist Atif Mian. 

Exports Per Capita in South Asia. Source: Dawn 


Balance of Payments Crises:

Every time Pakistan has faced a balance of payments crisis, the result has been massive currency devaluation, high inflation and slower growth for a period of multiple years. This is is exactly what Pakistan's current government led by Prime Minister Imran Khan is dealing with right now.  This pain is the result of years of flat exports, soaring imports and excessive debt taken on during former Prime Minister Nawaz Sharif's PMLN government from 2013 to 2018. 

Savings and Investment: 

The second reason why Pakistan lagged its Asian peers in terms of economic growth is its lower savings and investment rates. There's a strong relationship between investment levels and gross domestic product. The more a country saves and invests, the higher its economic growth.  A State Bank of Pakistan report explains it as below:

"National savings (in Pakistan) as percent of GDP were around 10 percent during 1960s, which increased to above 15 percent in 2000s, but declined afterward. Pakistan’s saving rate also compares unfavorably with that in neighboring countries: last five years average saving rate in India was 31.9 percent, Bangladesh 29.7 percent, and Sri Lanka 24.5 percent..... Similarly, domestic savings (measured as national savings less net factor income from abroad) also declined from about 15 percent of GDP in 2000s, to less than 9 percent in recent years. Domestic savings are imperative for sustainable growth, because inflow of income from abroad (remittances and other factor income) is uncertain due to cyclical movements in world economies, exchange rates, and external shocks".

Net Foreign Direct Investment Source: State Bank of Pakistan

21X Remittance Growth Since Year 2000:

Remittance inflows from Pakistani diaspora have jumped 21-fold from about $1 billion in year 2000 to $24 billion in 2020, according to the World Bank. In terms of GDP, these inflows have soared nearly 7X from about 1% in year 2000 to 6.9% of GDP in 2018.


Meanwhile, Pakistan's exports have declined from 13.5% of GDP in year 2000 to 8.24% of GDP in 2017.  At the same time, the country's import bill has increased from 14.69% in year 2000 to 17.55% of GDP in 2017.  This growing trade imbalance has forced Pakistan to seek IMF bailouts four times since the year 2000.  It is further complicated by external debt service cost of over $6 billion (about 2% of GDP) in 2017. Foreign investment in the country has declined from a peak of $5.59 billion (about 4% of GDP) in 2007 to a mere $2.82 billion (less than 1% of GDP) in 2017. While the current account imbalance situation is bad, it would be far worse if Pakistani diaspora did not come to the rescue.

Summary:

Pakistan's average economic growth of 5% a year has been faster than the global average since the 1960s, it has been slower than that that of its peers in East Asia. It has essentially been constrained by Pakistan recurring balance of payment (BOP) crises as explained by Thirlwall's Law. Pakistan has been forced to seek IMF bailouts 13 times in the last 70 years to deal with its BOP crises. This has happened in spite of the fact that remittances from overseas Pakistanis have grown 24X since year 2000. Every time Pakistan has faced a balance of payments crisis, the result has been massive currency devaluation, high inflation and slower growth for a period pf multiple years. This is is exactly what Pakistan's current government led by Prime Minister Imran Khan is dealing with right now.  This pain is the result of years of flat exports, soaring imports and excessive debt taken on during former Prime Minister Nawaz Sharif's PMLN government from 2013 to 2018.   The best way for Pakistan to accelerate its growth beyond 5% is to boost its exports by investing in export-oriented industries, and by incentivizing higher savings and investments. 

Related Links:

Haq's Musings

South Asia Investor Review

Pakistan's Debt Crisis

Declining Investment Hurting Pakistan's Economic Growth

Brief History of Pakistan Economy 

Can Pakistan Avoid Recurring IMF Bailouts?

Pakistan is the 3rd Fastest Growing Trillion Dollar Economy

CPEC Financing: Is China Ripping Off Pakistan?

Information Tech Jobs Moving From India to Pakistan

Pakistan is 5th Largest Motorcycle Market

"Failed State" Pakistan Saw 22% Growth in Per Capita Income in Last 5 Years

CPEC Transforming Pakistan

Pakistan's $20 Billion Tourism Industry Boom

Home Appliance Ownership in Pakistani Households

Riaz Haq's YouTube Channel

PakAlumni Social Network

24 comments:

Anonymous said...

yup which is why firms who are permitted to borrow from abroad in India MUST have significant USD earnings like Tata group(TCS alone brings in USD 20 billion for Tata),others like Indigo which buy 100s of planes ARE FORBIDDEN from taking foreign loans because most of their earnings is in Indian rupees.

Indigo pays for its planes from Airbus in Indian rupees.

This us the policy despite having FX reserves greater than 500 billion.

Riaz Haq said...

Anon: "This us the policy despite having FX reserves greater than 500 billion"

India is better than Pakistan in terms of exports but India too runs huge trade deficits. It relies mainly on foreign borrowing and FDI to make up for its continuing trade deficits. India still remains vulnerable to potential balance of payments crises.

Ahmed said...


Sir

I also wanted to tell you that I was reading about the downfall of SUPARCO(Space Agency of Pakistan ) .

In 1961 SUPARCO was setup in Karachi and it was the only Space Agency in entire South Asia at that time . ISRO(Indian Space and Research Organization )was setup in 1968 which is almost 8 years after SUPARCO .

In 1962, SUPARCO successfully launched its 1st mission in upper atmosphere and space called " REHBAR" ,this mission was a solid fuelled sounding rocket which was launched from Somiani Bay area on Makran Coast line of Pakistan . After this successfull launch, Pakistan became the 3rd country in Asia and 11th country in the world which could launch such missions in space and upper atmosphere ,and after this ,series of such rockets were launched by SUPARCO.

SUPARCO was making great progress but see Sir now where SUPARCO stands and where has ISRO stands .

ISRO(Indian Space Research Organization ) became 4th space agency in the world which could send a satellite on Mars planet .

Sir When Zulfiqar Ali Bhutto became President ,in 1970s,India conducted its 1st nuclear test . This created fear in the heart of President Bhutto . He ordered all those Scientists who were working in SUPARCO to leave their work and shift to Atomic Commission of Pakistan where they could learn about how to prepare and make nuclear bombs .

Ahmed said...

Sir

Can you pls explain what is national saving ? Can you pls give it's examples ?

The information about shipping corporation of Pakistan which I shared was actually from my Uncle who was in shipping corporation of Pakistan before .

Can we also say that the financial loss which Steel Mill in Karachi is suffering is also an example of loss of national saving ?

Anonymous said...

But India has been crisis free since 1991 and even that can be explained by the collapse of the USSR(Then Indias biggest trade oartner) but Pakistan has needed IMF help twice every decade.

Also IMF intervening so frequently will mean no chance of shielding national champions while they learn the ropes game that India practiced for over 50 years.

This i think is the main reason Pakistan has been unable to diversify its exports for the past 70 plus years..

Riaz Haq said...

Ahmad: "Can you pls explain what is national saving ?"

Here's how Investopedia defines "national savings":


The national savings rate measures the amount of income that households, businesses, and governments save. It is an economic indicator tracked by the U.S. Commerce Department's Bureau of Economic Analysis (BEA). It essentially looks at the difference between the nation's income and consumption and is a gauge of a nation's financial health, as investments are generated through savings.

https://www.investopedia.com/terms/n/nationalsavingsrate.asp

Riaz Haq said...

Anon: "This i think is the main reason Pakistan has been unable to diversify its exports for the past 70 plus years.."

Pakistan's domestic industries are quite diverse....making automobiles, airplanes, steel, cement, home appliances, pharmaceuticals in addition traditional stuff like textiles, leather, packaged foods, soaps, detergents, etc.

What is needed greater focus, knowledge of export markets and incentives for exports of what Pakistani industries already produce for domestic market.

Zamir said...

Mr. Ahmed,

Regarding SUPARCO's, couple of years I was talking to an ex-Suparco engineer and i asked him the same question. His reply was that Pakistan made a mistake of putting Suparco under military and DOD. So when sanctions were put on Pakistan it directly effected Suparco.

Zamir

Ahmed said...

Sir Zameer

Agree but pls note that it was President Zulfiqar Ali Bhutto who placed a millitary general as in charge of SUPARCO ,because all the Scientists were shifted from their to Atomic Commission of Pakistan . The head of SUPARCO at that time was also a Scientist ,but after when millitary general took over as head ,then obviously you can't expect it to make such progress .

What Scientists can think,you can't expect a millitary man to think because millitary persons are tuned and groomed in cantonments ,they can't think like Scientists .

But the question arises that why did President Zulfiqar didn't make a new group of Scientists and prepare and train them in space programs and handed over SUPARCO to them ?

Riaz Haq said...

#Pakistan #economy gains strength as #coronavirus cases decline. It's seen from growing cement-to-fuel sales & demand for home appliances to cars. Economist Muzammil Aslam who expects economic expansion at 4%-5% in current FY with demand push https://www.bloomberg.com/news/articles/2020-09-13/pakistan-s-economy-shows-momentum-as-virus-cases-taper-off via @markets

https://twitter.com/haqsmusings/status/1305555250925826053?s=20

Evidence of momentum returning can be seen from growing cement-to-fuel sales and demand for home appliances to cars. That’s happening even as Pakistan added fewer than 2,900 cases last week compared with almost 35,000 cases in a week in June, and 96% of the total 300,000 infected have fully recovered.

“It has surprised everybody,” said Muzzammil Aslam, chief executive officer at Tangent Capital Advisors Pvt., who expects economic expansion at 4%-5% in the year started July, higher than the government’s 2.1% target. “The growth is led by an aggregate demand push.”

Cement sales rose 38% from a year ago to 4.8 million tons in July, and near a record level seen in October. A government program to give amnesty to tax evaders, provided they fund construction projects, is expected to fuel activity -- and demand for cement -- as work resumes after the lockdown.

“We expect dispatches to continue their rising run moving forward because of tax measures,” said Saad Khan, research head at IGI Securities Ltd. “Substantial decline in interest rates and mandatory targets given for banks to increase housing and construction financing to at least 5% of private sector credit” will also help, he said.

Cement sales eased to 3.5 million tons in August, mainly because of torrential rains across the country.

Fuel Sales
Gasoline sales in June rose to a record high as people return to work after lockdown measures eased in May, according to A. A. H. Soomro, managing director at KASB Securities Pvt. Sales have stayed elevated in July and August.

Fuel for power generation has increased as well. Fuel oil sales rose in June to the highest in a year while LNG spot cargo purchase resumed in June after a six-month hiatus.

Car Sales
Local car deliveries have recovered to about 10,000 units after four months as the end of lockdown ushered in new demand.

Kia Motors Corp.’s local unit is planning to add a second shift at its factory in Karachi from January.

Manufacturing

Manufacturing output improved for a second consecutive month in June. The overall recovery in large-scale manufacturing will likely be stronger in the October-to-December quarter with worldwide demand picking up, said Khaqan Najeeb, a former adviser to Pakistan’s finance ministry. Home appliances are also seeing “robust demand,” said Haroon Ahmad Khan, chief executive officer at Waves Singer Pakistan Ltd.

Riaz Haq said...

How to fix Pakistan’s economy
Yousuf NazarUpdated 14 Sep 2020


https://www.dawn.com/news/1579562

Pakistan has gone through this boom and bust cycles many times before: an import-driven boom, balance of payments crisis, International Monetary Fund (IMF) bailout, stabilisation, a period of growth and then back to a crisis. This time is no different.

---------

These facts suggest that the reasons for Pakistan’s poor export performance are deep and structural. The 2019-20 improvement in the current account deficit has been largely the result of more than a $5bn fall in energy imports and (possibly one-off) record rise in the worker’s remittances as overseas Pakistanis return following the huge surge in unemployment across the globe including in the Middle East.

It is wrong to focus on just the so-called twin deficits: current account and fiscal. These are just symptoms of much wider and deeper issues including Pakistan’s chronically low savings and investments rate compared to its GDP. I would call them intellectual and capacity deficits. We need a growth model.

An exports-led growth model has lifted hundreds of millions out of poverty in countries like China, South Korea, Taiwan and Singapore. China invested heavily in education, particularly science and technology, as well as in heavy engineering and other capital-intensive industries. Foreign investors looking for trained and low-cost workers found no shortage of human talent as the ‘communist’ China had invested heavily in basic education and its Special Economic Zones (SEZs) jump-started the labour-intensive exports-led industrial revolution that has transformed China.

Tax concessions and government-guaranteed yields may have succeeded in attracting investments in the energy sector but this is an unsustainable model. Economic progress cannot be imported or borrowed. It has to come from long term pursuit of appropriate strategies through policies implemented consistently through competent governance. A successful national growth plan must have a 3D strategy: deregulate, devolve, and digitise.

Deregulation is essential to harness the energies of the private sector (especially medium-size businesses) severely constrained by bureaucratic hurdles and rent-seeking. Without devolution, it is impossible to provide basic services in a country with one of the fastest urbanisation rates, and without digitalisation, Pakistan cannot compete in a world defined by the digital divide as Bill Gates has put it. Imran Khan has three more years to change course. His success or failure would depend on how correctly he identifies the challenges and what resources and people he employs to meet those.


Anonymous said...

Elephant in the room while you remain dependent on the IMF you will not be able to build expertise and capacity behind tariff walls and NO COUNTRY has moved up the export value chain without decades of protection and funding for r&d for its domestic industry.

India built laughable cars and trucks for 50 years.Today no one laughs at Tata cars and trucks.Tata did not suddenly grow a brain overnight its product portfolio today is the result of decades of consistent investment in R&D. Same is true on a bigger scale for companies like Hyundai etc.


samir sardana said...

This is regarding the critique of ANONYMOUS on Fx Reserves,Exports and Borrowings.It is,unfortunately pure nonsense

Case 1

A Pakistani Cement Company with Nil Exports, via Torkhan,has the best USD Balance Sheet,in the world,among all cement units,in the world.Y ? dindooohindoo

It borrowed say 100 Billion Pakistani Rupees,10 years ago.At today's rates,assuming nil loan repayment,it has 650 million USD of Debt.10 years ago,it was perhaps 2 Billion USD.Caramba !

If it calculates it Capacity Cost in USD,id.est 650 million USD of Debt PLUS Equity at Today USD rates DIVIDED BY THE CEMENT CAPACITY = lowest COST IN THE WORLD

SO THERE IS NO ADVANTAGE,TO BORROW IN USD !

CASE 2

Take a Pakistani Exporter of Textiles.It took a Loan 10 years ago ,of 100 Billion Rupees.IT HAS NIL FX LOANS.Its debt,when taken was USD 2 Billion ,and TODAY it is at USD 650 Million (with no loan repayment).Its exports are getting the BENEFIT OF USD APPRECIATION.It has the best of both the worlds.

SO THERE IS NO ADVANTAGE, TO BORROW IN USD !

Suppose it exports worth 10 Billion Rupees per annum (as per their forecast then) and took a loan of 10 years receivables, in USD- which is 2 Billion USD,10 years ago.Today,w/o loan repayment, it would have a debt of USD 8 Billion

The above applies to Project Loans and Working capital loans (Packing Credit and WCDL)

So the THEORY THAT ONLY AN EXPORTER,SHOULD TAKE USD LOANS IS WRONG
THE THEORY THAT AN EXPORTER WHO TAKES USD LOANS,CANNOT LOSE - IS TERRIBLY WRONG
THE THEORY THAT A NON-EXPORTER IS AT A DISADVANTAGE,BY BORROWING IN INR OR PKR,IS ALSO WRONG
THE THEORY THAT AN EXPORTER WHO BORROWS IN USD, AND EXPORTS IN USD, WITH TO TIMING AND TENOR MISMATCH - HAS NO LOSS, IS ALSO WRONG (AS HE LOSES ON THE EXPORT PKR DEPRECIATION AND ALSO ON THE LOANS, HAD THEY BEEN TAKEN IN PKR)

CASE 3

The posit that Indian Aircraft companies ,do NOT borrow in USD, is also wrong. Aircrafts are bought on operating and financial leases - financed and re-financed, by international banks in USD.

In addition,ATF can be imported by Indian Aircrafts on Usance or Buyers credit, with 6 or 24 months of payments,after rollovers.These are in USD.Even if ATF storage tanks are not available - then can load in foreign airport hubs.

Case 4

Indian FX reserves are not built up,on Trade Surpluses.If there is a Indo-China Eco war - the reserves will disappear very quickly.

Case 5

Indian FX reserves are meaningless.Indian Banks NPA and Frauds,post COVID (w/o considering bank loans, which will NEVER BE repaid),will be in excess of USD 350 Billion.Pakistan, fortunately is a trading nation, and has built manufacturing capacities, only in those sectors,where it has a natural advantage like cement etc., and even in the rest, the capacities have lagged demand.

Then there are the MUDRA loans of USD 300 Billion.In the POST COVID world,does anyone think that more than a third,of these loans will be repaid ?

And then look at the Consol Deficit of the GOI and States.WHAT FX RESERVES ARE LEFT ?

Anonymous said...

Many economists suggest that the government has achieved its first goal, maintaining economic stability in Pakistan. In this article, I will argue that the economy is still in turmoil and stability is far away.

https://tribune.com.pk/story/2263833/has-imrans-govt-stabilised-pakistans-economy

Stabilisation is achieved when all key macroeconomic indicators start performing at their optimum – growth-facilitating – level. One significant measure is the rate of inflation and the other is the interest rate.

Both are connected. When inflation is high, the interest rate should also rise to compensate for the time value of money and maintaining monetary discipline in the economy. In Pakistan, the Consumer Price Index (CPI) was recorded at 8.2% in August 2020. Although it is the lowest in the last three months, expectations are high that the CPI will rise in the coming months.

The key interest rate is at 7%, which is arbitrary since the State Bank of Pakistan (SBP) is keeping it at a low level to facilitate post-Covid recovery in the market. This negative interest rate is, in fact, a signal that the monetary policy is still not disciplined and sooner or later the SBP will revise its monetary policy goals.

Another indicator of stabilisation is the fiscal policy, which deals with spending and taxing accounts of the state. The fiscal deficit in the last two years was more than 8% of gross domestic product (GDP), the highest in the last four decades, even though the government is maintaining the lowest public spending.

I do not think the PTI government will keep retaining this lowest level of spending since this policy is hurting its popularity in public.

Current account

The fourth major proxy of economic stability is the current account balance. At present, Pakistan’s current account balance is in surplus. But two main factors are responsible for manipulating its present level.

One is the low level of imports due to the uncertain economic situation caused by Covid-19, volatile exchange rate and ambiguous economic policies of the present government since 2018.

The second is remittances which are increasing not due to any efficiency of the present government. Mainly, migrants send more money to their families when they find them in more financial difficulties or they decide to return to their home countries.

Dependence on remittances is like reliance on foreign markets and not on the domestic economy. It is evident that in the last two decades the more Pakistan relies on remittances, the more decline we see in exports. The reason is that the remittances are providing key support to the current account balance.

This reduces incentive for the government to remove those policy barriers which hurt productivity, innovation and competence in the domestic market. Without a strong competent market, Pakistan cannot boost its exports and sustain its growth rate at a more than 5% level.

One major barrier is the import-restricting protectionist policies. The economic literature is very clear in explaining that free trade policies boost exports and economic activities in a country.

Riaz Haq said...

#UK increases #Export Finance country limit for #Pakistan to £1.5 billion. UK is Pakistan’s 3rd largest export partner, accounting for 7% of Pak's total exports to the UK. Increase in #credit #financing limit will help turbo-charge trade between the two. https://www.gov.uk/government/news/uk-increases-export-finance-country-limit-for-pakistan

This announcement will boost trade partnerships between the two countries and unleash Pakistan’s growth potential. UKEF helps secure large contracts by providing attractive financing terms to buyers and supporting working capital loans.

The British High Commissioner to Pakistan, Dr Christian Turner met with the Federal Minister of Commerce for Pakistan Razaq Dawood today to discuss trade ties and business potential between the two countries. The Commerce Minister welcomed the UKEF’s announcement of an increase of £500 million in the credit limit for business investment in Pakistan, especially at a time when Pakistan is looking to expand its trade potential to mitigate the impacts of COVID19.

The British High Commissioner, Dr Christian Turner said;

UK credit financing for Pakistan has tripled in the last two years, and is key to achieving my ambition to double the trade between the UK and Pakistan. It is a sign of our confidence in Pakistan and the strength of the unique relationship between the two countries. I encourage all Pakistan businesses to look for opportunities to partner with the UK on their journey towards economic prosperity.

The UK is Pakistan’s third largest export partner. Between July 2019 and March 2020 Pakistan exported 7% of its total exports to the UK, and the increase in the credit financing limit will help turbo-charge trade relations between the two countries.

Notes to the Editors:
UK Export Finance (UKEF) is the UK’s official Export Credit Agency (ECA) working closely with the Department for International Trade (DIT).
Its mission is to ensure that no viable UK export fails for lack of finance or insurance, while operating at no net cost to the taxpayer.
In 2019/20, UKEF provided £4.4 billion of support for UK exports globally.
UKEF recently completed a comprehensive review of its Country Limits, resulting in increases in over 100 markets including Pakistan
The Export Financing offered is quite attractive if comparing to a commercial bank
There is a baseline requirement for 20% of the whole deal to come back to the UK, but that doesn’t necessarily mean –for example –the whole construction on the ground or the production of a specific product. It looks at the whole supply chain. The 20% can come from a UK company that looks after the procurement of services as part of a bigger deal. This makes UKEF very attractive for multinational consortiums.

Riaz Haq said...

#Remittances from overseas #Pakistanis exceed $2 billion for third month in a row. 'Over the last three months, remittances reached an unprecedented level of $7.3 billion, which is 37.2% higher than the same period of last year' #COVID19 https://profit.pakistantoday.com.pk/2020/09/14/remittances-exceed-2bn-for-third-month-in-a-row/ via @Profitpk

Remittances rose to $2.095 billion in August, according to data released by the State Bank of Pakistan (SBP) on Monday, depicting a year-on-year growth of 24.4pc when compared with August 2019.

On a monthly basis, however, remittances were 24.3pc lower than the $2.768 billion remittances posted in July 2020. According to the SBP, this monthly decline reflected the usual seasonal decline in the post Eidul Adha period.

Most of the remittances in August were received from Saudi Arabia, at $593 million; followed by UAE at $410 million; and the UK at $302 million.

According to the SBP, workers’ remittances have now remained above $2 billion for the third month in a row.

In July, remittances were recorded at $2.77 billion, which was the highest ever level of remittances in a single month in Pakistan. And in June, remittances were recorded at $2.47 billion, which the SBP had dubbed as ‘historic’ at the time.

“Over the last three months, remittances reached an unprecedented level of $7.3 billion, 37.2pc higher than the same period last year,” the SBP noted.

According to the SBP, the rise in remittances is due to two reasons.

First, there has been increased efforts under the Pakistan Remittances Initiative (PRI). Under the PRI, the threshold for eligible transactions was changed from $200 to $100 under the Reimbursement of Telegraphic Transfer (TT) Charges Scheme, there has been an increase in adoption of digital channels, and a push for targeted marketing campaigns to promote formal channels for sending remittances.

Second, there has been a gradual re-opening of businesses in major host countries such as Middle East, Europe and United States.

It is a view echoed by analysts.

According to Tahir Abbas, head of research at Arif Habib Ltd., there has been an increase in remittances flows though formal channels.



Samiullah Tariq, head of research at Pakistan Kuwait Investment, also said that more overseas Pakistanis are using official banking channels to remit money to their homes, as there was a closure of flights and restriction of movement due to the Covid-19 pandemic.

Typically, money is sent to Pakistan by people physically carrying cash in their luggage, when they travel to visit Pakistan. However, due to the Covid-19 pandemic, and the subsequent cancellation in flights, people were forced to switch to formal channels, in an effort to make sure money reached their families.

In addition, the movement of cash transported on flights increases during Hajj and Umrah season. But this year, due to the Covid-19 pandemic there was a limited Hajj, and a bank on Umrah, which further curtailed people’s ability to send money through informal channels, and pushed them to use formal channels.

’31PC SURGE IN JULY-AUG’

Meanwhile, Prime Minister Imran Khan said on Monday remittances received by the country have increased by 31pc during the first two months of the fiscal year as compared to the same period last year.

Taking to Twitter, the premier said remittances of $2,095 million were received in August, which is an increase of 24.4pc.

samir sardana said...

Export Strategy - Part 1

The export strategy of Pakistan,should be based on export of water,labour,earth,defense and LDC benefits.Any other model will fail,as competitive nations,with deep pockets,will offer financial,fiscal and asset subsidies,to offset any advantage,that Pakistan,has w.r.t labour cost and geography (besides excellent logistics,and regulatory structures). dindooohindoo

Setting up manufacturing capacities,to cater to the local Pakistani market and exporting the surplus,is not viable,as Pakistan does not have economies of scale (even to realise the geometric impact,of lower labour costs).Planning capacities on that model,leads to the DISASTER of the Indian NPAs,of 350-400 Billion USD,with exports dead,and the inability of Indians,to compete,with the PRC.

Export of Water - is export of animal proteins,exotic fruits and vegetables and agri to the GCC,EU and other parts of the world.Water from the skies or the earth,by rarefaction or condensation or precipitation,in the form of hail,rain or snow,is purely a function of geography,in a time span of a few decades.Over a period of 3-4000 years,some disasters can occur,like the disappearance of Saraswati (in Pakistan) or the diversion of rivers etc.

Thus,water captures the fertility and agro-ecoonomic opportunities and variety of Pakistani soil,and also,the geo-strategic location of Pakistan (w.r.t access to GCC,Ports,Cheapest Point of Purchase for UN/FAO/WHO procurements for Afghanistan etc.)

In Pakistan,Water is a Perpetual Resource,UNLIKE in India.In addition,many nations in the EU allow a COO certificate linked to a Geography,in that exporting nation, to give ADDITIONAL DUTY/SUBSIDY AND QUOTA BENEFITS. These are agriculture and agri-derivatives,like wine.Pakistan is the prime candidate, for the same,for exotic fruits etc., which have valuable and critical,downstream applications,in the EU.

Export of Earth - is export of minerals,which ALSO,includes industries like Cement (which is export of lime,limestone and coal).Once the Coal Fields of Pakistan,are tapped,then it would include sale of power,as the cheapest way to transport power,is at the speed of light,via a grid - especially,when the Grid is set up by other nations.

Pakistani Mineral Resources are almost perpetual,and in areas with very low density of population and ample water.Thus the scope for TOLERATING pollution is higher - and so,like in Nuke Power - if some latitude is granted w.r.t pollution,wastes,effluents,safety and environment - mining costs can crash exponentially.For a Perpetual reserve,with an exchange rate of Rs 160/USD,it is akin to burying US Dollars, 1000 meters in the earth,and starving on top of the earth.For a nation,with finite reserves (in the short term),there is an opportunity cost,of exports - in terms of the fact that,in 2023 (say),prices of several ores might be 2-5 times,current rates - and so,they can raise USD,from bankers,liening the mining reserves.

Export of Defense - In conjunction with the PRC and the PLA/PLN.PLAF,Pakistan can perfect the technique of customising and innovating Chinese Defense Technology,for their use,and exporting lower technologies or the excess capacities to Africa,Central Asia,LATAM,South America and the Middle East (excluding the quasi Nato nations).With Chines=se Financial Aid, extensive credits can be given.There are many nations in the world,which the PRC would NOT like to make defense exports to.

Export of Labour - Pakistan needs to be practical,to use low cost manufacturing technologies,which are labour intensive and require moderate power consumption,and some pollutive impact.Low Capital Costs,will lower the Operating and Financial Risk,and the skilled but CHEAPER labour cost,can be exported OUT.There would be several such technologies,several products and several markets.

LDC - Lastly,Pakistan has to maximise the LDC benefits,using Chinese Capital and SEZs - with an appropriate mix of Chinese Labour and Domestic Input Costs,in the SEZ units, so that the COO is Pakistan,and the LDC benefits are availed of.

samir sardana said...

Export Strategy - Part 2

SEZs - The SEZ policy of Pakistan has to be synthesised with the LDC gains,to ensure that the costs to the SEZ,are the lowest among all LDCs in the world.However,the Costs are not to be evaluated,as the Nominal Costs.So the land lease and other charges,payable by the SEZ to the Pakistani State, might not be the lowest - but on a NET differential Mode,w.r.t the Reduction in Logistics costs,to the Pakistani SEZ,it should be the LOWEST in the world. Once that is done,then as a thumb rule, to keep the laws simple, FREE EXIM needs to allowed and all Inputs (including Power etc.) should be sourcable,w/o caveats.So a SEZ should be able to set up a IPP/CPP/RPP,anywhere in Pakistan,with any fuel,with nil duty and taxes and the lowest wheeling and banking charges.dindooohindoo

Corporate Tax holidays should start AT THE CHOICE of the Investor,FROM THE YEAR after which the Brought forward losses,of the SEZ are exhausted.And the Tax holiday should be co-terminus,with that of the longest holiday,by any LDC.The period of limitation,for the Choice of initiating the holiday period,should be upto 5 years,from commercial operations.

Basically,even if Pakistan waives the Wheeling charges etc.,it does not matter,as the aim is to bring in the ANCHOR and other Investors in the SEZ. Thereafter,the principles of Self Preservation by the SEZs,and its units,will ensure that,the State will find ingenious ways to earn revenue - provided that,1st the ANCHOR comes in,and then, that the SEZ and the SEZ units,make money !

Riaz Haq said...

In the outgoing FY (2019-20), Pakistani expatriates remitted a record of $23.12 billion with more than 6% year-on-year (YoY) growth compared to $21.74 of FY 2018-19.


http://tribune.com.pk/article/97174/the-curious-case-of-pakistans-spiralling-remittances

The momentum has not only persisted but amplified in on-going FY 21 with a whopping $2.77 billion remittance in July, followed by an inflow of $2.095 billion in August. This unprecedented surge is bemusing, and what has baffled many is the fact that this escalation has occurred during the pandemic. So, what could the potential triggers to this mammoth inflow be?
The extraordinary leap can be primarily due to the tightening of informal money markets, which has augmented the inflow through formal banking channels. In the budget for FY 2020-21, the incumbents allocated Rs25 billion to formalise foreign remittances, which would aid in stockpiling foreign exchange reserves to service colossal national debt obligations.
Pakistanis typically used to carry cash in their luggage physically. But due to flight reduction and sparse international travels, they would have been compelled to access official banking channels for money transfers. Also, remittances might have incremented on account of significant job losses in the Gulf region due to the Covid-related recession. Hence the spiral may demonstrate high one-time repatriation of money back to Pakistan.
On the other hand, the State Bank of Pakistan (SBP) has emphasised an orderly ‘market-based’ exchange rate management and sound policymaking under the Pakistan Remittance Initiative. The SBP sheds the spotlight on the reduction of the threshold for eligible transactions from $200 to $100 under the Reimbursement of Telegraphic Transfer (TT) Charges Scheme. It also stressed on adoption of digital channels and targeted marketing campaigns to promote formal routes. Similarly, IT-related freelance services’ payment limits have increased from $5,000 to $25,000 per individual per month. The SBP believes that it has facilitated to enhance home remittances through formal banking channels in Pakistan.
The crux of the matter is remittances will upslope further in the future due to effectuated compliance of formal banking channels. Still, the recent abnormal increment will ease down in the coming months when the western economies recuperate from the ramifications of the Covid-related slump.

Riaz Haq said...

#Pakistan earns $1.44 billion in #IT #exports, up 20.72% from $1.19 billion from last year. #computer services exports grew 23.44% as it surged to $1,106 million from US $ 895.990 million last year. #technology #economy #trade https://dunyanews.tv/en/Business/561082-Pakistan-earns-US$1438-million-from-IT-services-export-during-FY2019-20

Pakistan earned US $ 1438.827 million by providing different information technology (IT) services in various countries during July-June (2019-20).

This shows growth of 20.72 percent when compared to US $ 1191.864 million earned through provision of services during the corresponding period of fiscal year 2018-19, Pakistan Bureau of Statistics (PBS) reported.

During the period under review, the computer services grew by 23.44 percent as it surged from US $ 895.990 million last year to US $ 1106.027 million during July-June (2019-20).

Among the computer services, the exports of software consultancy services witnessed increase of 14.98 percent, from US $ 354.397 million to US $ 407.492 million while the export and import of computer software related services also rose by 11.62 percent, from US $ 285.235 million to US $ 318.368 million.

The exports of hardware consultancy services decreased by 16.55 from, US$ 2.345 million to US$ 1.957 million whereas the exports of other computer services rose by 51.91 percent from US$ 247.976 million to US $ 376.699 million. In addition the export of repair and maintenance services however witness decline of 74.97 percent from $6.037 million to $1.511 million.

Meanwhile, the export of information services during the period under review increased by 61.39 percent by going up from US $ 1.580 million to US $ 2.550 million.

Among the information services, the exports of news agency services increased by 100.89 percent, from US $ 0.677 million to US $ 1.360 million whereas the exports of other information services also increased by 31.78 percent, from US $ 0.903 million to US $ 1.190 million.

The export of telecommunication services also witness increase of 12.22 percent as these went up from US $ 294.294 million to 330.250 million during the fiscal year under review, the data revealed.

Among the telecommunication services, the export of call centre services increased by 26.17 percent during the period as its exports increased from US $ 98.858 million to US $ 124.730 million whereas the export of other telecommunication services also increased by 5.16 percent, from US $ 195.436 million to US $205.520 million during the period under review, the PBS data revealed.

It is pertinent to mention here that the services trade deficit of the country during the fiscal year (2019-20) decreased by 42.96 percent as compared to the corresponding period of last year.

During the period from July-June, 2019-20, services exports decreased by 8.66 percent, whereas imports reduced by 24.25 percent, according the data released by Pakistan Bureau of Statistics.

The services worth US $ 5.449 billion exported during the period under review as compared the exports of US $ 5.966 billion in same period of last year, whereas imports of services into the country was recorded at US $ 8.284 billion as against the imports of US $ 10.936 billion, the data revealed.

Riaz Haq said...

Fitch has warned of decline in remittances amid the #Coronavirus shock. But #remittances have been robust in #Pakistan and Bangladesh. ADB says 14% of households in #Bangladesh, 8% in #Philippines, 4% in Pakistan and 2% in #India receive remittance income. https://www.fitchratings.com/research/sovereigns/apac-remittances-to-decline-amid-coronavirus-shock-08-09-2020

Fitch Ratings-Hong Kong-08 September 2020: The coronavirus pandemic and subsequent impact on the oil market are having a considerable effect on migrant workers and are likely to supress remittance flows in the APAC region, Fitch Ratings says in a special report. We expect flows to weaken in the coming quarters, even though recent amounts have been surprisingly robust in some countries due to temporary factors. Declining remittances in economies that are dependent on them may affect sovereign ratings through pressures on external finances and economic growth.

Demand for migrant labour has provided an important and stable source of foreign-currency remittance flows for a number of APAC sovereigns, including Bangladesh (6.0% of GDP), Pakistan (7.9%), Sri Lanka (8.0%) and the Philippines (8.4%). India is the largest recipient of remittances globally but they account for a small share of GDP at 2.9%. Remittance flows have helped keep current account deficits contained by offsetting large trade deficits. Indeed, without remittances the Philippines, Pakistan, Sri Lanka, and Bangladesh would all have large current account deficits of between 7%-10% of GDP.

Remittances in APAC also provide economic benefits to recipient countries. First, they support domestic consumption by providing an additional income source to households. According to the Asian Development Bank, about 14% of households in Bangladesh receive remittance income, 8% in the Philippines, 4% in Pakistan and 2% in India. Second, job opportunities for migrant workers relieve slack in domestic job markets.

Remittance flows in APAC were surprisingly mixed in the second quarter of 2020. Monthly data show a considerable and broad decline in remittances during April and May, as Fitch expected, but a recovery in June and July. The rebound in flows was particularly robust in Pakistan and Bangladesh, where flows broke records in both June and July. Sri Lanka and the Philippines also saw an improvement in remittance flows in June, but much more modest.

Anecdotal evidence points to temporary factors for the increase in recorded remittances in the recent period. These include migrant workers transferring their savings in preparation to return home, the impact of lockdown restrictions on transferring funds and a shift to formal remittance channels, which are picked up in the official data.
Fitch forecasts a 12% decline across the region in the second half of the year as the temporary support factors fade.

The deterioration in remittance inflows is likely to widen current account deficits, contributing to higher external financing needs. For countries with fragile external finances, such as Pakistan and Sri Lanka, the shock to remittances could exacerbate existing challenges. Lower oil prices and subdued import demand, however, are likely to soften the aggregate impact on external balances.

Remittances typically provide a countercyclical buffer for economic activity and vulnerable households. In domestic economic shocks, family members working abroad can increase remittances to help mitigate the impact of sluggish domestic activity. The pandemic, however, represents a much more synchronised global economic shock than previous downturns. This limits the potential support of the remittance channel.

Lower remittance flows could affect public finances through two channels: lower revenue collection from weaker consumption and higher social spending to support remittance-dependent households as well as returning migrant workers. Many countries in the region already have limited fiscal space to address the current coronavirus shock and the decline in remittances could exacerbate current challenges.

Riaz Haq said...

Workers' #remittances to #Pakistan above $2 billion for 4th consecutive month in September, increasing to $2.3 billion, 31.2% up from last year, and 9% higher than in August. Remittances rose to a record $ 7.1 billion in Q1-FY21, 31.1% up over last year.


https://www.marketscreener.com/news/latest/State-Bank-of-Pakistan-Trend-of-Strong-Workers-Remittances-Continues-in-September-12-10-2020--31521606/


ERD/M&PRD/PR/01/2020-106

October 12, 2020

Trend of Strong Workers' Remittances Continues in September

Workers' remittances remained above $2 billion for the fourth consecutive month in September. They increased to $2.3 billion, 31.2 percent higher than the same month last year and 9 percent higher than in August.
On a cumulative basis, remittances rose to a record $ 7.1 billion in Q1-FY21, 31.1 higher than the same period last year.
The level of remittances in September was slightly higher than SBP's projections of $ 2 billion. Efforts under the Pakistan Remittances Initiative (PRI) and the gradual re-opening of major host destinations such as Middle East, Europe and United States contributed to the sustained increase in workers' remittances.

Riaz Haq said...

‘Exports to increase up to $28 bn by end of current fiscal’, says Razzak Dawood. “Though we need to do a lot on various conventions, but the progress on many issues mentioned in the detailed report will help continue the GSP Plus facility for Pakistan.” https://www.thenews.com.pk/print/728019-exports-to-increase-up-to-28-bn-by-end-of-current-fiscal


Razzak Dawood Tweet:I happy to share the good news that more and more brands are shifting to Pakistan. We just heard that Hanes, Guess, Hugo Boss & Target have shifted orders from China to Pakistan.

https://twitter.com/razak_dawood/status/1321838253788532736?s=20



Riaz Haq said...

October #remittances to #Pakistan grow 14% to $2.3 billion, the 5th consecutive month above $2 billion. Remittances up 26.5% to $9.4 billion during the first 4 months of FY21, compared with July-Oct FY20. #economy #ImranKhan #PTI- Profit by Pakistan Today https://profit.pakistantoday.com.pk/2020/11/12/october-remittances-grow-14pc-to-2-3bn/#.X63Oa81wOr8.twitter

Workers’ remittances amounted to $2.3 billion during October 2020, showing an increase of 14.1 per cent when compared with October 2019.

This is for the fifth consecutive month that workers’ remittances remained above $2 billion, according to latest figures released by the State Bank of Pakistan (SBP) on Thursday.

A large part of the year-on-year (YoY) increase in October this year, 30pc, was sourced from Saudi Arabia, 16pc from the United States of America and 14.6pc from the United Kingdom (UK).

“Improvements in Pakistan’s FX market structure and its dynamics, efforts under the Pakistan Remittances Initiative (PRI) to formalise the flows and limited cross-border travelling contributed to the growth in remittances,” the SBP stated.

Meanwhile, on a cumulative basis, workers’ remittances rose 26.5pc to $9.4bn during the first four months of FY21, when compared with July-Oct FY20.

“These numbers were expected. The whole South Asia region is getting above-average inward remittances due to lockdown and reduction in flights and movement of unofficial funds,” said Muhammad Sohail of Topline Securities.

“In the short-run, this [the increase in remittances] will support local currency,” he added.

Earlier, a World Bank report had projected that remittances to Pakistan to grow at about 9pc in 2020, totalling about $24bn.

The World Bank attributed this increase to the diversion of remittances from informal to formal channels due to the difficulty of carrying money by hand under travel restrictions.