FeaturedNationalVolume 14 Issue # 08

The bugbear of the national economy

It is a welcome development that the current account deficit has moderated somewhat during the current fiscal year. According to the latest data released by the State Bank, CA deficit decreased to dollar 3.665 billion during the first quarter of FY19 as compared to dollar 3.761 billion in the same period of last year, showing a decline of dollar 96 million or 2.5 percent during the period. Goods’ import bill, nonetheless, continued to surge, increasing by 6 percent or dollar 763 million to dollar 13.765 billion in July-September 2018, up from dollar 12.993 billion in the corresponding period of last year while goods’ exports rose by 4 percent to dollar 5.884 billion. Goods’ trade deficit jumped to dollar 7.882 billion during the first quarter of FY19, up from dollar 7.314 billion in the same period of last year.

In this context, it may be mentioned here that Pakistan’s CA deficit swelled to an all-time high of $18.9 billion in the financial year 2017-18. The rising CA deficit was attributed to the ballooning trade deficit due to the continuous increase in imports and the slide of the rupee against dollar. According to State Bank of Pakistan statistics, the CA deficit was $12.6 billion in FY17, showing a year-on-year increase of 50 percent. The current account deficit was a destabilizing factor for other macroeconomic indicators as well. The ballooning trade deficit resulted in the depletion of foreign reserves and the weakening of local currency against the greenback. The imbalance of payments between exports and imports stood at $31 billion in FY18. Last year, the current account deficit was the highest that the country faced in its history. The deficit was due to the continuation of machinery imports both for CPEC and non-CPEC energy and infrastructure projects, whereas, imports for plant upgradation under the ongoing export package for the textiles sector also added to the pressures.

A detailed analysis of the latest figures released by the State Bank shows that with dollar 1.292 billion of exports and dollar 2.23 billion of imports, the country’s services sector deficit declined to dollar 938 million compared to dollar 1.276 billion last year while income sector’s deficit was almost steady at dollar 1.479 billion with dollar 168 million earnings and dollar 1.247 billion of payments. However, on a month-on-month basis, CA deficit was recorded at dollar 952 million in September, 2018 as compared to dollar 592 million in the last month, posting a sharp increase of dollar 360 million or 61 percent. It may be recalled here that the CA deficit during FY18 had reached a record level of dollar 18.1 billion due to higher imports of energy, transport, food and metals and insufficient inflows of foreign investment and home remittances.

As foreign inflows proved inadequate to plug the CA deficit, the SBP had to utilise its foreign exchange reserves which fell by dollar 6.4 billion during FY18. Although it is too early to say something definite about the CA deficit during FY19, the trend so far indicates that the country would not be able to cut the CA deficit significantly during FY19 despite its best efforts to do so because of considerable time lag between the implementation of right policies and their outcome in the external account. However, some improvement in the foreign sector accounts in July-September 2018, after a significant deterioration in FY17 and FY18, is of course a positive development for the country. If this trend continues or improves further, it would reduce the need to borrow from outside sources, reduce the speed of reduction in foreign exchange reserves and the value of the rupee.

Foreign investors would feel more comfortable if Pakistan is able to negotiate a programme with the IMF. The stamp of approval by the Fund increases the chances of financial inflows from bilateral and multilateral sources and the country is obliged to undertake necessary reforms to balance the external sector accounts on a sustainable basis. It goes to the credit of the present government that, unlike the previous government, it is trying harder to reduce or eliminate the CA deficit altogether and looking seriously for borrowing options to meet the foreign sector gap in the meantime. In fact, it has accorded the highest priority to this area so that the country does not become insolvent and unable to meet foreign obligations.

Keeping the gravity of the situation in view, the PTI government has improved/increased regulatory duties on imports, devalued the Pak rupee by a considerable margin despite a lot of criticism on this move, introduced certain measures to increase home remittances through banking channels and has finally decided to approach the IMF, appreciating criticality of the situation; and it has not shied away from requesting the friendly countries to lend a helping hand to Pakistan. [Negotiations with the IMF have stalled over conditionalities. The next Pak-IMF meeting is expected to take place in February 2019. Ed]

There are two main worries at this point: the country’s vulnerability to external shocks, and its ability to keep financing the current account deficit given the gradual erosion in its foreign reserves position. However, the country’s growth prospects are encouraging and there is a favorable outlook for exports and remittances. But, until there is a significant improvement in the current account balance, pressure will continue to mount on the country’s reserves. This, in turn, creates the constant need to arrange external financing so that the foreign exchange reserves position offers some level of comfort. The central bank recently raised the interest rate to 7.5pc from 6.5pc and allowed depreciation of the rupee to an unexpected level. Both these decisions are designed to contribute to stabilizing the economy in the longer run.

One of the urgent needs is to curtail imports. The import bill reached a high level of $60.86bn by end of June 2018, while export proceeds bought a mere $23.22bn, leaving a huge trade deficit of $37.64bn.The import bill went up despite the imposition of regulatory duties twice and other restrictive measures taken by the central bank in the outgoing fiscal year. Experts are of the view that more efforts are needed to control the rising import bill and raise revenue for achieving the current  year’s revenue target to bring down the fiscal deficit.