Early signs of improvement in current account deficit

The deteriorating trend in the country's current account deficit witnessed for the last few years seems to have been finally arrested. According to the latest data released by the State Bank, Pakistan's current account deficit declined significantly by 43 percent during December, 2008 due mainly to reduction in global commodity prices.
In dollar terms, it fell from dollar 800 million in November, 2008 to dollar 458 million in the subsequent month, indicating a fall of dollar 342 million. However, overall current account deficit during the first half of FY09 amounted to dollar 7.269 billion compared to dollar 6.053 billion in the same period of 2007-08, showing an increase of 20 percent due to comparatively higher deficit in the earlier months of the current fiscal year.
With export receipts of dollar 10.04 billion and import payments of dollar 17.65 billion, the country's merchandise account deficit widened to dollar 7.613 billion compared with dollar 6.23 billion in the corresponding period of last year while services sector showed a significant improvement, with its deficit narrowing to dollar 2.303 billion from dollar 3.296 billion during July-December, 2007.
Income deficit stood at dollar 2.365 billion, as income from abroad stood at dollar 569 million as compared to payments of dollar 2.934 million during the first half of 2008-09. However, it needs to be noted that trade data released by the FBR is generally at variance with the merchandise account statistics compiled by the State Bank due to difference in timing, coverage etc and current account of the country does not include capital and certain other receipts.
That is why, despite a deficit of dollar 458 million in current account, dollar 708 million were added to foreign exchange reserves of the country in December, 2008 as against the utilisation of dollar 492 million in the previous month.
A positive turn in the current account deficit during December, 2008 is a welcome development and would indeed provide a great deal of relief to the policy makers of the country. The current account position of the country, it may be recalled, had slipped into red in 2004-05 after posting a surplus in the previous three years and was worsening continuously since then.
The situation was so bad in 2007-08 that current account deficit widened to about $14 billion or 8.5 percent of GDP which, by all indications, was unsustainable. The initial months of 2008-09 witnessed accentuation of this trend with the result that the country started losing its foreign exchange reserves very rapidly and the rupee rate came under intense pressure.
Realising that the country could default on its foreign exchange payment obligations, Pakistani authorities were finally forced to seek assistance from the IMF by entering into a Stand-By Arrangement in November, 2008. The programme with the Fund envisages the current account deficit to narrow to $10.6 billion or about 6.5 percent of GDP during 2008-09. If the latest trend continues, the country could expect to achieve this target comfortably.
Although exogenous factors like a sharp decline in international oil prices have certainly helped to reduce the import bill, consistent efforts by the Pakistani authorities to restrain import demand through tightening of monetary policy and imposing of 100 percent of cash margin on non-essential imports have also slowed down the flow of imports into the country. Nonetheless, it needs to be noted that the latest reduction in external sector deficit is attributable mainly to the reduction in imports rather than the expansion in exports.
The recent slowdown in exports is a cause of concern due to its negative impact on business activity and employment situation in the country. Be that as it may, the latest improvement in current account deficit could go a long way in stabilising the rupee rate, bolstering the foreign exchange reserves and eliminating the insolvency threat to the country. Besides, it could indirectly contribute to enhance the confidence level of foreign investors and soften the inflationary pressures in the economy by augmenting supplies of various commodities in the country.