Current account deficit (CAD) is again becoming a source of concern to policymakers with many independent economists arguing that unless mitigating policy measures are taken now it may well surpass the 20 billion dollar deficit in 2018 inherited by the Khan administration.
There are three major components of the current account deficit - trade, remittances and financial accounts. Pakistani governments, including the incumbent, have largely focused on reducing a rising trade deficit by incentivizing exports and/or dis-incentivizing imports through a wide range of policies that include monetary measures (cheap and easy credit and/or rupee depreciation) and fiscal incentives (lower taxes and cheaper utilities for export sectors). Needless to add, an unsustainable current account deficit has been the main reason for Pakistan seeking an International Monetary Fund (IMF) programme (currently Pakistan is on its 23rd on average three year programme in its seventy four year history) which facilitates access to cheaper long term external credit from other multilaterals as well as bilaterals.
Trade deficit in the first quarter of 2021-22 (July-September) registered (-) 11.664 billion dollars and if it continues at this rate it would rise to 46.65 billion dollars by end-June 2022 - 24 percent higher than the 37.5 billion dollars inherited by the Khan administration as shown in the Table (source: Pakistan Bureau of Statistics).
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(Million US $)
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Year Exports Imports Trade deficit
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2016-17 20,422 52910 32,488
2017-18 23212 60795 37,583
2018-19 22958 54763 31,805
2019-20 21394 44553 23,159
2020-21 25304 56380 31,076
FY22 69,600 18,600 11,600
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Pakistan commodity exports have remained largely traditional and have not responded appreciably to rupee erosion or monetary and fiscal incentives (though their withdrawal does lead to plummeting exports). The focus, several administrations, including the incumbent insist, lies in developing a non-commodity export base.
Rise in imports today is not keeping pace with the rise in exports - a trend visible throughout the country's history. Be that as it may, one factor that is clearly external to Pakistani decision making is the international price of fuel (petrol and products) and cooking oil which together account for, on average, more than a quarter of our import bill each year.
Imports were relatively contained in the past compared to today in spite of fuel touching a high of 140 dollars per barrel in 2008 because the rupee dollar parity at the time was 83 to the dollar. Today Brent is 85 dollars per barrel but with a rupee dollar parity of over 174 domestic prices are prohibitively high especially as income levels have not risen by as much.
Two observations with respect to the trade deficit are as follows: (i) the disastrous Dar formula of keeping the rupee overvalued encouraged imports and discouraged exports. However, in 2018-19 the trade deficit declined by 15 percent from the year before. In 2019-20 it declined by 27 percent from the year before after the staff level agreement was reached on 12 May 2019 with the International Monetary Fund (IMF) and the Khan administration's then newly appointed economic team led by Dr Hafeez Sheikh, (appointed on 18 April 2019) and Dr Reza Baqir, Governor State Bank of Pakistan (appointed 6 May 2019). Disturbingly, the cost of the additional 12 percent decline in 2019-20 (27 minus 15 percent achieved the year) was at a very high cost paid for by the people of this country with: (i) a growth rate of 1.5 percent, negative 7.4 percent for manufacturing and negative 10.1 percent large-scale manufacturing accompanied by significant unemployment; and (ii) inflation of 13 percent.
The cost of the 12 May 2019 staff level agreement with the IMF was also visible on the country's macroeconomic indicators belying claims of stabilization with: (i) a massive rise in domestic and external indebtedness due to: (a) converting short- term into long-term debt at a time when the discount rate was 13.25; (b) heavier reliance on Pakistan Investment Bonds - from 3.4 trillion rupees in June 2018 to 14.3 trillion rupees by March 2021 a major component of the rise in total domestic debt from 16.4 trillion rupees in June 2018 to over 26 trillion rupees today; (c) portfolio inflows of around 2.5 to 3 billion dollars that, as feared, left the country soon after the onslaught of the pandemic; and (d) heavier than ever reliance on external loans to finance the budget - with around 15 billion dollars procured to pay off past loans and more than 5 billion dollars earmarked for budget support (with the budget deficit during the past three years unsustainably high).
The situation no doubt deteriorated subsequent to the onslaught of the pandemic end-March/early April 2020 (three months prior to the end of the fiscal year) with growth for the year registering at negative 0.4 percent and inflation at 12 percent.
However ignored were the three positives associated with Covid-19: (i) easing of monetary and fiscal policies for the productive sectors in general and construction sector in particular which jump-started the economy and accounts for the 3.9 percent growth in 2020-21 though it is mainly sourced to increase in consumption; (ii) around 3.9 billion dollar rise in exports last year in comparison to 2019-20 due to diversion of orders from India and other regional countries; (iii) debt deferment by G-7 known as the Debt Relief Initiative which accounted for nearly 1.24 trillion rupees in the revised estimates of 2019-20 under current expenditure and has since been zero; and (iv) remittance inflows reaching a historic high of over 29 billion dollars associated with global travel restrictions leading to cessation of the hundi/hawala system though the State Bank of Pakistan claims its policies contributed to this rise.
Second component of the current account are remittance inflows which July-September 2017 were 4.79 billion dollars and thenceforth there has been a significant rise - to 5.47 billion dollars in 2019, 7.15 billion dollars in 2020 and July-September 2021 the total inflows are 8 billion dollars. The rising trajectory has not reversed even though the pandemic-related travel restrictions have begun to ease.
And finally, the government has much more control over the financial accounts, defined as claims/liabilities to non-residents reflective of policy decisions, instead of on trade and remittance inflows, and it is apparent that performance of the financial accounts has not received government attention.
The July-June 2019 financial accounts were negative 11.7 billion dollars followed by negative 9.3 billion dollars in July-June 2020 which declined further last year to negative 8.19 billion dollars. However July-August 2021 the figure noted on the State Bank of Pakistan website is negative 4.96 billion dollars and at this rate the total for the year would rise to an unsustainable 29.76 billion dollars.
The July-August 2021 figure is attributable to the rise in liabilities incurred which rose to 3.9 billion dollars July-August 2021 against 582 million in the comparable period of the year before though central bank registered negative 998 million dollars July-August 2020 as opposed to positive 2 million dollars in the comparable period of 2021 with disbursements to federal government remaining more or less constant at 1.3 billion dollars July-August 2021 against 1.2 billion dollars last year.
Economic theory dictates that if a current account deficit is being financed by borrowing, with associated costs, it will become unsustainable and today the rise in domestic and foreign debt has crossed all previous records. In addition, loss of currency (from 152 rupees to the dollar in May 2021 to 175 rupees to the dollar today) would raise the risk of capital flight (visible in the portfolio investment outflows) as there would be loss of confidence in the value of the currency by both foreigners and residents.
To conclude, debt as a factor in the current account deficit has not been the focus of the present government, as during previous administrations, and one would hope that this is remedied.
Copyright Business Recorder, 2021
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