EDITORIAL: "No growth, no deficit," an economist aptly put it in the context of the Pakistani economy. In FY18, the current account (C/A) deficit was USD 19 billion and economic growth was over 5 percent. Since then, growth tanked, and so did the C/A deficit. But it's not that simple to bring back growth by allowing high deficits. The equation is not complete without bringing foreign exchange holdings. In FY18, the current account deficit was higher than the country's reserves. The debt was bound to grow. IMF progarmme was an inevitability, and deficit had to be controlled. Interest rates had to move up, and currency had to depreciate. Growth, therefore, tanked too. Now, the situation is much better in terms of deficits. The C/A is well in surplus in the July-Nov 2020 period. There are early signs of economic revival. The growth contraction is primarily linked to import contraction. The imports are bouncing back. Low oil prices are keeping some check on the total value of imports. Ex-petroleum imports (On PBS data) are the highest since May 2019 and growing.
This was the time when monthly imports, according to Pakistan Bureau of Statistics (PBS), were hovering around USD 4.5-5 billion. Oil prices averaged above USD 60 per barrel at that time and in November it was around USD 43/barrel. There had been some progress towards the Covid-19 vaccine, helping oil cross USD 50/barrel mark in December. If the oil prices persist over USD 50, import bill can be back in the range of USD 4.5-5 billion soon. It is already averaging at USD 4.2 billion in the last three months.
The prime minister is being informed about this; and in a recent talk, he expressed his worries about potential slippage in C/A balance due to growth. And all those economists, who were chanting in 2018 that there can be no country's sovereignty without controlling deficit, are now the strong proponents of higher growth. The import contraction cycle was already on mean reverting - based on past 20 years' analysis, prior to the outbreak of Covid-19; and with a 625 basis points (bps) reduction in interest rates, the pace of recovery has picked up. Undervalued currency will not bring pressure on currency due to a pick-up in imports.
The real challenge for State Bank of Pakistan (SBP) is to build up reserves at a comfortable level to let the imports grow to support economic growth. It can be therefore plausibly argued that growth with deficit is only possible when the country has certain comfortable level of reserves. When the reserves are high, the world is ready to finance it - even without any support from the International Monetary Fund (IMF). A ballpark figure is of having USD 20 billion in the SBP kitty - currently the number is at USD 13.3 billion. The SBP should target it at USD 20 billion by June 2021. There are reports that claim that the pandemic will be over by 2021 summer; and the world will come back to the pre-Covid-19 normal or to a new normal. There will be some dent on remittances' growth. Right now, USD 500 million a month uptick in remittances due to less travel is giving space for higher imports. Low oil prices due to less travel are giving another USD 400-500 million savings in imports. The direct savings due to drastically reduced travel are of USD 100 million a month. Higher donations and charity are adding another USD 150 million to savings. The overall C/A savings due to Covid-19 are estimated at USD 1.2-1.25 billion a month. Some growth in remittances may sustain post-Covid-19 as those who have moved to formal channels may continue to stay there. The oil prices may not cross and sustain above USD 60/barrel: there will be some savings. The rest of the benefits will go. The C/A deficit may come around USD 500 million a month by June 2021. That could be well managed. But that won't be enough to get back to higher growth trajectory. If the government wants FY22 and FY23 to move up to 3-5 percent growth or even beyond, the deficit could be higher. Remittances may not be the saviour in the 2020s as was the case in the 2010s. Goods' exports will not be enough (in next 5 years or so) to cater to growing imports demand. The reliance must be on market-based borrowing and services' exports. The world will only be ready to lend if we have consistency in economic policies and clarity on the political landscape.
Copyright Business Recorder, 2020
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