Pakistan’s accumulated current account deficit has reached US$19 billion and it faces payments worth US$9 billion for previously taken loans. However, the fiscal steps taken by the government and monetary policy actions announced by the State Bank of Pakistan have shrunk the current account deficit by US$6 billion thus the current account deficit may total US$12-13 billion in the current fiscal year. Similarly, the deficit in trade in goods and services has also increased to US$32.6 billion, up from US$27.3 billion a year ago. The external sector deficit is not new for Pakistan and we have witnessed this since the sixties with few exceptions.
Only two years ago, current account deficit was less than US$5 billion, which is now at over US$12 billion. Persistent current account deficit is defiantly not good for the economy as it shows certain fundamental weakness in the economic system. This trend clearly shows two things — one, Pakistan is consuming more than what it is producing and the gap is widening. Therefore, Pakistan needs to work on the diversification of its policies, should encourage exporters, and identify sectors where in exports can be enhanced.
The State Bank of Pakistan (SBP) has enhanced the deficit for the previous fiscal year by around US$1 billion to a record high of US$18.99 billion compared with US$17.99 billion reported in July 2018. The deficit shrank 2.5 percent to US$3.66 billion in first quarter (July-Sept) of the current fiscal year compared with US$3.76 billion in the same quarter last year.
Latest numbers suggested that the drop in the current account deficit in the first quarter of FY19 has mainly come from the increase in worker remittances and increase in exports. Otherwise, imports has maintained a steady growth and FDI has dropped sharply. Changes in remittances, exports and imports came after the State Bank let the rupee depreciate by a massive 27 percent to Rs135 to the US dollar in the inter-bank market in the past 10 months and hiked the benchmark interest rate by 275 basis points to a 44-month high at 8.5 percent. The central bank reported that the remittances increased 13 percent to US$5.42 billion in the July-Sept quarter compared with US$4.79 billion in the same quarter last year. Moreover, exports of goods rose 3.60 percent to US$5.88 billion compared with US$5.67 billion last year whereas imports of goods improved 5.87 percent to US$13.75 billion compared with US$12.99 billion last year. The FDI dropped 43 percent to US$438 million in the FY July-Sept quarter compared with US$763 million in the same quarter last year.
In the previous fiscal year 2018, the SBP said, the 13-year high GDP growth of 5.8 percent was achieved at “the cost of widening macroeconomic imbalances as manifested in a five-year high fiscal deficit and a record high current account deficit in FY18”. The State Bank has projected economic growth of 4.7 to 5.2 percent for the current fiscal year against the ambitious target of 6.2 percent. Whereas the International Monetary Fund (IMF) and the World Bank have projected economic growth in the range of 3 to 4 percent for FY19. The unsuitable current account deficit drained currency reserves to a critically low-level at around US$13 billion. Although, Pakistan’s foreign exchange reserves have increased to US$14.7 billion after addition of US$1 billion funds received under Saudi financial assistance as of November 22, 2018.
Former Finance Minister, Ishaq Dar claimed that his IMF program was one of the most successful programs Pakistan has ever had, it succeeded in reducing budget deficit from 8.5 percent of GDP in 2012-13 to 4.6 percent of GDP by 2015-16, and Pakistan’s fiscal deficit was reduced to the extent of almost 4 percentage point of GDP during the program period.
It is being said that the previous government showed a lower budget deficit through accounting gimmickry and by changing the definition of revenue, expenditure and budget deficit. Despite this, Pakistan failed to cut its budget deficit under the IMF Program during 2013-14 to 2015-16. Prime Minister Imran Khan has repeatedly said this at various international forums that the current account deficit is the biggest challenge Pakistan is facing these days. Therefore, Pakistan has approached IMF once again and will resume negotiations with IMF post new year holidays.
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As a matter of fact, this is not the first time Pakistan has approached IMF, it has gone to the IMF several times in the past for the balance-of-payments support. Pakistan is among few countries which approach IMF once in every five years. Last three governments had approached, obtained and closed IMF programs. Now, this is the fourth successive government approaching IMF for financial package. IMF is usually the last resort for countries for all bailout packages. There is no harm in approaching IMF, the problem is not following the program in its later and spirit and thereafter causing more trouble for the country. IMF typically asks governments for reforms, expanding tax net, bringing fiscal disciple and other related measures. Moreover, it also demands to have a flexible exchange rate policy where the exchange rate is to be determined by the market itself, which can then promote exports. In addition, getting debt is absolutely not an issue unless it is not used for the purpose it was obtained.
There is a wrong concept among people that debt is something very bad for the economy. No bank or financial institution will ever give a loan unless it is satisfied with the borrower’s ability to repay. It’s a separate debate why companies or countries fail to repay their debts. Therefore it is important to spend money wisely and should be monitored accordingly otherwise there would be serious consequences for the state and stress on the country’s cash flows.
There is a direct relationship between fiscal and current account deficits. As a principle, higher the fiscal deficit higher the current account deficit. Pakistan has so far failed to generate enough tax collections and despite efforts, tax-to-GDP ratio couldn’t reach to an acceptable level. Government’s major source of revenue is from tax collection. Therefore, fiscal discipline is extremely important for bringing down the gap. Pakistan has so far failed to bring fiscal balance, which is also a cause of deteriorating current account deficit. As a practice, the Government of Pakistan relies on foreign borrowing to cover the gap and for increasing the foreign exchange reserves. Consequently, we have piled up a huge external debt yet we don’t have enough foreign currency reserves. In order to widen the tax net, the Federal Board of Revenue (FBR) has started a massive drive for the recovery of taxes from big and influential tax evaders.
Exports are the backbone of any economy, it helps to earn foreign exchange, which thereafter can be used to pay off oil and other imports bills. The government should, therefore, focus on increasing the exports of the country. In the current environment, it is important to focus on small and medium-sized organizations (SMEs) and encourage professionals to start their own business and venture. In addition, Pakistan also needs to diversify its current export base. Country’s current export base is limited to basic commodities which include textiles, leather, cotton, wheat, grains, rice, and fruits, etc. It is required to establish new manufacturing facilities and export value-added items. Pakistan has a huge market for cell phones and laptops yet it imports cell phone sets and laptops whereas there should be a couple of cell phone and laptop manufacturing facilities in the country. Such facilities will not only help in reducing the import bill but can also increase exports. Pakistan should work with friendly countries and try to convince them for the transfer of technology that will open many business avenues in Pakistan. Value-added exports have many benefits including getting higher cash inflows and better profit margins.
There are various reasons of drop in exports by 20 percent since 2013-14 including a number of structural factors and wrong policies. Pakistan follows a policy of import substitution rather than export promotion. Because of this, there is a little emphasis on broadening the export base where textile products are major export items. Most of the local manufacturers have shifted their facilities from Pakistan to other countries, due to which country’s exports have dropped. Despite the relocation of textile factories, exports of cotton yarn, cloth, and value-added textiles constitute almost 60 percent of Pakistan’s total exports. Pakistan should export garments, towels, bed sheets, hosiery items, frozen meat products, powdered milk, cheese instead of exporting simple cotton, yarn and animals. Most of the country’s manufacturing sectors are neglected and are hit by taxation on inputs, higher cost of electricity and gas and the high cost of financing facilities.
In order to cover the gap, Pakistan should use a combination of regulatory duties and successive exchange rate depreciation to manage the growing imports and falling exports. Government alone cannot do everything, therefore, the private sector should come forward and invest in new areas and expand their existing business.