Pakistan’s current account deficit is a hardy perennial. The government wrongly thinks that loans from the IMF is an answer to the problem. At best, the dole-out from the international donor provides a temporary relief. Ultimately, Pakistan has to find an indigenous solution to its current account problem. The latest loan tranche of $1.12 billion from the IMF has made no difference to the liquidity crisis the country is facing.
The State Bank of Pakistan (SBP) reported $8.8 billion of forex reserves for the week ended September 2, showing an increase of 14 per cent over a week earlier. The reserves now represent import cover of just 1.6 months, up marginally from 1.5 months a few weeks earlier. On the other hand, the devastating floods, which caused $15-20bn of losses, as per the government’s initial estimate, have further aggravated Pakistan’s economic fundamentals.
The latest State Bank of Pakistan figures show that the current account deficit jumped to the second-highest ever level of $17.3bn in 2021-22 from $2.82bn in 2020-21. The deficit has stayed at more than $1bn in nine of the twelve months of 2021-22 and was $1.21bn in July 2022.
If steps are not taken to reduce the deficit, it will put further pressure on our meagre forex reserves and the Pakistan rupee will lose more value. As stated above, the handouts from the IMF or more loans from other countries is no answer to the current account problem which is basically caused by our widening trade imbalance which totaled $48.38bn for 2021-22, going up by 56pc from a year earlier, according to a report by the Pakistan Bureau of Statistics (PBS). The increase in the trade deficit was due to the 42pc rise in imports as opposed to just a 27pc growth in exports.
The long term solution lies in increasing exports and cutting imports which is not being done. No government has paid sufficient attention to this aspect of the matter. No doubt, a principal reason for surging import costs has been the unusual movement in international commodity prices. But things are easing on this front lately which will give some relief to Pakistan.
It may be added here that prices of various commodities, such as wheat, copper, and crude oil, have fallen recently amid rising interest rates around the world. The Brent oil price is down nearly 25pc from its recent peak. The Bloomberg Commodity Index, which tracks prices of nearly two dozen materials, including grains and energy products, has fallen by 13pc since mid-June. This decline should help cut down Pakistan’s import bill.
But because of structural weaknesses Pakistan trade remains vulnerable to the vagaries of the international market. Another price hike, and our trade deficit will soar. A sustainable solution is to increase our exports and for this we should take urgent steps to strengthen and widen our industrial and manufacturing base.
We need to reduce our imports, particularly of energy products such as petrol and diesel which are the biggest burden on our import bill. The crude oil price surged in the first half of 2022, but prices of refined products like petrol and diesel went up even higher due to soaring demand. With high prices and growing consumption, Pakistan ended up spending $12bn on procuring petroleum products in 2021-22.
One way to ease the burden is to raise the domestic production of petrol and diesel higher. In this sector we have not done much. The country’s oil refining industry has stagnated during the last few years. According to a report, a large chunk of the oil refining capacity remains underutilised. As a result, roughly 30-40pc of the country’s diesel and 60-70pc of petrol demand is met through imports, as per various estimates. This is a big drain on our economy. According to experts, Pakistan’s output of petrol and diesel can rise by around 50pc if refineries fully utilise their plants.
Needless to say, the oil refining industry must expand its capacity at the earliest policy. To this end the policymakers should work with the refining industry and other stakeholders, such as the independent power producers to ensure full utilisation of installed capacity as well as add to it. The government should also devise a new package of policies to encourage investment in expanding and upgrading oil refineries and plants.
Another way to boost local production is to deregulate the petroleum sector. Unnecessary government interventions, such as the regulator’s role, have done more harm than good. Rather the market should be made free and competition should be encouraged.
A tested and tried way to boost exports is to open up the economy, invite foreign investment and link up with multilateral trading systems. Trade barriers should be removed so that the domestic industries can procure raw materials and equipment globally at attractive prices. In this way Pakistan’s domestic companies will be in a position to produce high-quality products and compete in the international market. Incentives like duty-free imports of machinery should be given to exporters to scale up their operations. It is time Pakistan stopped looking towards the IMF for relief and devised new ways to boost exports which alone can provide a long-term solution to the ticklish issue of current account deficit.