The current account deficit stood at $1.6 billion in Jan - third highest ever in the history of the country. No wonder the reserves are depleting fast and the money raised by Eurobond/Sukuk in Dec is all evaporated in thin air. The 7MFY18 CAD registered at $9.2 billion (4.7% of GDP), up by 48 percent or $3 billion YoY.
The culprits are imports which are unstoppable despite the currency adjustment in Dec - the bill was $4.9 billion in Jan, second highest ever. The toll for 7MFY18 stood at $31 billion, an increase of 18 percent on yearly basis. The biggest challenge in the short to medium term is to slowdown the imports growth which is becoming hard.
The exports are showing revival; but they are too low to impact current account imbalances seeing the upbeat imports growth. Exports came at $2.1 billion in Jan which is still shy by $500 million from its peak in Jun11.
The trade deficit is still too high to tame CAD and at this pace, the CAD is likely to reach $16-17 billion (4.8-5% of GDP). That is too high a number and increases the gross financing requirement for not letting the reserves to come down any further. The good news is that Pakistan has got three months’ extension on FATF which gives an opportunity for government to raise some loans from global capital market, short term financing from commercial banks, some cushion from China and can push multilaterals to send the so-called official flows.
The inflows from western multilaterals (WB, ADB, IDB etc) are contingent upon IMF’s letter of comfort. The Fund’s post monitoring report was due in Feb and has now shifted to the start of March. The delay is on signing off by government authorities on Fund’s projection on macroeconomic indicators.
The CAD may hover around upper band of revised target of 4-5 percent of GDP while the fiscal deficit is surely to be shy of 4.1 percent of GDP. There might not be much debate on inflation which may remain in single digits even in FY19. The question is on the fate of fiscal deficit as how would it impact the external imbalances and what are the austerity measures government should take to control the imbalances.
The consolidated fiscal deficit stood at 2.2 percent of GDP (Rs796bn) in 1HFY18 as compared to 2.5 percent of GDP in 1HFY7. On the face of it, fiscal accounts are doing just fine. However, the twin deficit theory defies the improvement in fiscal accounts whilst the current account is worsening.
The low fiscal deficit in the 2QFY18 is due to upbeat growth in revenues, especially tax revenues; and surpluses shown by provinces. Barring provincial surpluses, the federal fiscal deficit stood at 2.6 percent of GDP. Mind you, in FY17 the provinces shown combined deficit of Rs163 billion versus budgeted surplus.
The question is why are the provinces shy of spending now? It is the trick federal government plays by transferring the funds to provinces close to the quarter end eluding provinces to spend. There is a fair chance that the provinces would spend each and every penny they have close to elections. And may be a reason of swaying away by 0.8-1.0 percent of GDP from consolidated deficit budgeted target of 4.1 percent of GDP.
On tax revenue front, federal government is doing a good job - FBR tax collection increased by 19 percent while overall tax revenues grew by 18 percent. The problem is non-tax revenues where Rs300 billon collection in 1HFY18 is around one-fourth of the yearly target. Hence, the shortfall in non-tax revenues and surge in development expenditure (mainly by provinces) would result in slippage in the fiscal deficit from the targeted numbers.
The development spending is growing rampantly - up by 25 percent, year-on-year, to reach Rs559 billion. The federal government has so far spent Rs248 billion in the first half out of Rs1,001 billion in the full year. The government would not be shy of spending in the second half and that would exert pressure not only on fiscal deficit but also on current account as well. The point is everyone is concerned on CAD but no one really is talking about fiscal deficit. That is the elephant in the room; and IMF should and would have its prime focus on curtailing fiscal deficit in its probable upcoming programme .
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