Fuelled by a huge trade deficit, Pakistan's current account deficit during 2005-06 reached a worrisome 4.7 percent ($5.683 billion) of the gross domestic product (GDP), posing a threat to the economy simultaneously on both internal and external fronts.
The State Bank of Pakistan (SBP) on Sunday reported that the current account deficit was the largest, both as a share of economy and in dollar terms. During the period under review (July-May 2006), the current account deficit, excluding official transfers, grew by more than 218 percent to $5.683 billion, against $1.784 billion of previous fiscal year.
It is worth mentioning that owing to higher than expected trade deficit, the Finance Ministry revised the target for current account deficit and set it at $5.137 billion (4.2 percent of GDP) against budgeted target of $2.7 billion (2.19 percent of GDP) for FY06. But, at the end of the year, it breached the ministry's target by a sizeable margin.
According to independent economic experts, this external disequilibrium in the shape of current account deficit may have a significant impact on the value of the rupee--a matter attracting keen attention around the country. Besides, it would translate into a large increase in Pakistan's net foreign debt position. A large and growing public debt could also eventually put pressure on interest rates and crowd out private investment.
The government's economic managers, on the other hand, are of the view that Pakistan is enjoying an economic boom, and the current account was manageable by borrowing from abroad, remittances, drawing down reserves and inflow of investment.
The country has witnessed this current account imbalance as trade deficit (in goods and services) jumped to $12.84 billion during FY06 from just $7.81 billion in FY05. The trade deficit figures are arrived at using free-on-board value of imports and exports.
The central bank's data shows that goods imports stood at $24.984 billion whereas exports totalled $16.50 billion, thus leaving a trade imbalance of $8.44 billion. The services account also witnessed a large imbalance of $4.40 billion during Fy06 as inflows under this account stood at $3.748 billion and outflows totalled $8.15 billion. The factors responsible for this huge deficit were higher outflows on account of transportation, travels, insurance, construction services, royalties and licence fees.
Pakistan had to spend $2.856 billion on transportation account, whereas its earning under this head was only $1.06 billion. Thus, the net deficit in the services account due to chartering of vessels for imports, exports shipment was $1.79 billion.
Another factor responsible for big services' account deficit was a net outflow of $1.185 billion on account of overseas travelling. Pakistan had to spend $1.40 billion to finance personal and business-related travelling abroad of individuals and groups whereas it earned only $216 million under this account. Hence, the services account deficit in FY06. The same applies to spending on insurance and royalties and licence fees paid to international organisations and their employees operating in Pakistan.
The imbalances in trade and services were so large in FY06 that the current account turned negative despite a strong build-up in current transfers. Net current transfers rose to $10.62 billion during the period, from $8.768 billion in FY05.
Current transfers went up as Pakistan received $4.60 billion in workers' remittances or foreign exchange sent home by overseas Pakistanis, up from $4.17 billion in previous year.
A big increase in foreign currency deposits, held by resident deposit holders also boosted current transfers. However, it declined to $312 million against $521 million primarily because of the stable rupee.
Independent economists have also questioned time and again that how long the trade deficit would continue on that trajectory without disrupting the economy? And, how much longer can Pakistan continue to spend more than it earns, and support the growth? And, are the inflows sustainable in the long run?
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