Very fragile BoP

The balance of payments (BoP) numbers for the first seven months of 2021-22 have been released recently by the SBP (State Bank of Pakistan). The numbers are truly scary and highlight the extremely vulnerable position of Pakistan with regard to the sustainability of external transactions of the country.

The current account deficit has hit an all-time peak level of almost dollar 2.6 billion in January. Cumulatively, the deficit has reached the level of dollar 11.6 billion in the first seven months of 2021-22, equivalent to over 6 percent of the GDP on an annualized basis. This is in sharp contrast to the IMF and the SBP projection of 4 percent of the GDP. If the trend persists then the annual current account deficit could approach the record level of dollar 19 billion in 2017-18.

Despite large inflows, the financial account and receipts in the balance of payments have not been large enough to fully finance the current account deficit. Consequently, the overall balance of payments has seen a deficit of dollar 0.3 billion, despite the big dollar 2.8 billion inflow of SDRs from the IMF and dollar 3 billion loan from Saudi Arabia.

The deterioration in the current account is primarily a reflection of the extreme worsening in the balance of trade in goods. Over the seven-month period, imports have increased by as much as 55 percent while exports have risen by 27 percent. The higher growth rates are primarily a reflection of much higher international commodity prices. The trade deficit is larger by over 83 percent. A stage has been reached where imports are now almost 250 percent of exports. Clearly, this is not sustainable.

There is a similar worsening in the balance of trade in services, with a near doubling of the size of the deficit. Exports of services have risen by 18 percent due partly to the emergence of IT exports. But imports of services have shown a much higher growth rate of 39 percent, largely as a consequence of higher shipping freight costs.

There has been little change in the balances in primary income and secondary income flows of the current account. Home remittances have registered a growth rate of 9 percent over the seven-month period. However, there was a decline of 5 percent in January.

Turning to the financial account of the balance of payments, the net inflow is large by historical standards. At dollar 11.6 billion in the first seven months of 2021-22, it is even larger than the annual net inflows in 2019-20 and 2020-21 of dollar 8.2 billion and dollar 9.3 billion respectively.

As highlighted above, the lumpy inflows have been dollar 3 billion from Saudi Arabia in December and dollar 2.8 billion of SDRs from the IMF (International Monetary Fund) in August. Beyond these inflows, the normal inflows from bilateral, multilateral, and other sources in the government account have been dollar 2.6 billion in net terms. The level of foreign direct and portfolio investment combined stands at dollar 1.7 billion.

The overall balance of payments position for the seven-month period is a negative dollar 0.3 billion. The large inflows into the financial account have been more than neutralized by the mushroom growth in the current account deficit. After the repayment of dollar 516 million to the IMF, the foreign exchange reserves as of the 31st of January 2022 are lower in relation to the level as of 30th of June 2022 by dollar 815 million.

The level of reserves as of the end of January 2022 was dollar 15.7 billion. The latest magnitude is dollar 16.8 billion as of the 18th of February. Despite the inflows in the intervening period of dollar 1 billion from the flotation of the Sukuk bond and dollar 1 billion from the IMF following the successful completion of the sixth review, the increase in reserves is less at dollar 1.1 billion.

All the above trends indicate that Pakistan is vulnerable to a financial crisis in coming months due to very large current account deficits, not fully financed by inflows into the financial account, leading thereby to a depletion of foreign exchange reserves and putting pressure on the value of the rupee.

There is need for the SBP and the Ministry of Finance to make a transition to a crisis management mode of the external balance of payments. Now, in the face of the Russia-Ukraine war, international commodity prices which were already high have jumped up further to unprecedented levels.

The price of oil after the start of the full-scale war has risen to the highest level after 2014 to dollar 103 per barrel. Prices of wheat, sugar, palm and soyabean oil, cotton, etc. are also rising rapidly. This could add 8 percent to 10 percent to the monthly import bill, equivalent to an increase of over dollar 500 million. Consequently, the current account deficit could remain high in coming months at close to the level of dollar 2.6 billion reached in January 2022.

How will the financing of such large deficits be arranged? The remaining amount of the IMF loan is dollar 3 billion is due in three installments after successful completion of the seventh, eighth and ninth reviews in March, June, and September, respectively. Included in each review is the fulfillment of various tough performance criteria, indicative targets and structural benchmarks. The current IMF programme then comes to an end in September 2022. The big issue is the fulfillment of these requirements for successful completion of each review.

Meanwhile, there is growing uncertainty in the political front, with the likelihood of a no-confidence motion by the opposition in the Parliament. The focus of the Government is inevitably on managing the political process and averting an exit from power. There is, therefore, less focus on managing the incipient crisis in the balance of payments. Exclusive attention is required to prevent an unfolding financial collapse. Otherwise, there is the risk of a quantum depreciation in the value of the rupee and runaway inflation.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2022