A deceleration in external debt and a marginal decline in total external liabilities were visible. A marked decline occurred in the outstanding amount of domestic debt due to the extraordinary retirement of treasury hills held by SBP. While the restructuring of bilateral credits through the Puris Club will result in substantial reduction iii foreign exchange payments during the grace period, the reduction in floating debt till relieve some pressure from tile government in terms of reduced interest payments on domestic debt. Both of these developments augur will for the future course of economic development.
Pakistan was able to record a historical overall, surplus of about US$1.2 billion on its balance of payments during the first six months of FY02 despite the shock and aftermath of September 11 event, deepening of the world recession ad the tension with neighbouring India. Although the US-led war against terrorism had created significant uncertainty in Pakistan's economy in terms of a potentially adverse political fallout, the stance taken by Pakistan and the fact that the Afghanistan campaign effectively ended in December, allowed the government to maintain domestic calm, re-establish its international status and also gain from certain windfalls. In terms of the latter, the sharp turnaround in domestic sentiments concerning the external sector is adequately reflected in the appreciation of the Rupee and the unprecedented increase in liquid foreign exchange reserves. Although the donor support to Pakistan for the war effort figures prominently in this build up, the reverse capital flight and stronger inflow of worker remittances also contributed significantly.
Despite the impressive Balance of Payments (BoP) out turn in the first six months, it is too premature to declare victory. More specifically, it is difficult to disentagle the temporary or transitory factors from the structural shifts as a number of underlying parameters have changed in the post September 11 period global recession has worsened, Pakistan's trading relations were disrupted due to the war in Afghanistan; the exchange rate differential between the kerb and interbank market disappeared; world petroleum prices have declined: and smuggling to Afghanistan has dwindled. In effect, the continuation of these trends in future months will determine the balance of payments outcome for the fiscal year. Yet there are some structural shifts that can already be factored in. For example, in addition to commitments for external grants and concessional loans, Paris club creditors have approved the relief on debt servicing of about US$1 billion during the current fiscal year. Also, increase in quota and reduction in tariff by the European Union will lead to some modest improvement in exports.
While the setback in terms of fiscal revenues, exports and to some extent, industrial production was significant, the mind-set change in the external sector allowed for an unprecedented surplus in the current account. More specifically, the sharp fall in the import bill has actually reduced the trade deficit, despite a fall of 0.4 per cent in exports during the first half of FY02. Falling international oil prices and lower quantitative imports of POL, have not only reduced Pakistan's import bill in Dollar terms, but still allowed for higher non-oil/non-food imports into the country, compared to the corresponding period last year. Furthermore, the gain in the external sector has paved the way to address the long-standing structural distortions created by the parallel foreign exchange market (Hundi). The first step towards merging the interbank and Hundi markets will take place in July 2002, as foreign exchange companies will come into existence.
The enhanced international stature of Pakistan also helped secure favourable terms in the restructuring of its bilateral external debt. For example, the recent US proposal to write off approximately US$1 billion of its bilateral loans to Pakistan, has resulted in better terms than had been negotiated with Paris Club members in the past. …