EDITORIAL: The current account (C/A) is one economic variable that is coming under control, no thanks to the economy coming to a screeching halt.
The country is paying a huge cost in terms of unemployment and lower growth due to these policies. Without instilling reforms, there is no way of survival other than by bringing the imports down substantially. In an economy where growth has historically been contingent on imports, compromising growth cannot be a desirable outcome.
The current account posted a marginal surplus in February 2024, and the deficit is lower than a billion dollars in 8MFY24, which is one-fourth of the deficit in the same period of last year.
Both the government and the SBP (State Bank of Pakistan) were desperate to control the current account slippages last year as the SBP reserves were dwindling and financing the external gap had almost become an impossible task at a time when the country was on the verge of default on its external sovereign debt.
SBP was slow in tightening the monetary policy in FY23 and as a result of which the currency remained under pressure for a long time. Amid sluggish economic policy response, both the SBP and ministry of finance came up with a policy of administrative control on imports where in the initial stage quotas were allotted in certain sectors and thereafter, banks were asked to match their respective inflows and outflows.
SBP increased the policy rate to 22 percent in July 2023 which is the highest in the country’s history, and the currency massively depreciated around the same time. The impact of these two policies is now reflected on economic demand, as demand for imports today, in most of the sectors, is even lower than the restricted allowance last year.
For example, in FY23, CKD imports by automobile players were allowed at 50 percent of corresponding imports in FY22; and today, the OEMs are not even importing half of FY22s’ level as cars assembly is down by 69 percent in 8MFY24 versus 8MFY22 year-on-year. An identical story exists in many other industries such as steel as well.
This is also evident from the fact that the volumes in the interbank fell to abnormally low levels. However, the decline is unnatural, and it was investigated and upon inquiry, reasons offered by sources in bank treasuries differed.
While some attribute this to Letters of Credit issuance requests being rejected at approval stage suggesting a degree of artificiality in what looks like demand compression, others insist that the demand is genuinely down.
The truth, however, may lie somewhere in between, and situations could vary from industry to industry. For example, auto and steel demand is genuinely very low, while few Letters of Credit could also be rejected in the approval process as is the case with solar panels. This could have also raised concerns with the IMF that the foreign exchange market is not operating as freely as it should.
The bottom line is that the overall demand is very low and that is reflected in the near zero current account deficit position. The worrisome fact is that manufacturing exports are not growing despite the massive currency adjustment and capacity expansion and modernization under concessional TERF (temporary economic refinance facility) loans.
The main impediment is ever-increasing energy tariffs owing to inefficiencies in the energy value chain and lopsided contracts with the IPPs (independent power producers).
Nonetheless, agricultural exports, especially rice, is on the rise, which is due to a better crop performance at home and export ban by the world’s biggest exporting country, India. The encouraging trend is improved exports in other agro sub-sectors as well.
The real catch is in the growth of ICT exports and freelancing services. The IT exports are up by 15 percent to $2 billion in 8MFY24.
However, the full potential is not being realised, as many small and medium IT services providers remit their proceeds informally, while others do not bring all the money back.
Some services exports and remittances are netted off in the informal hundi/hawala market against the capital flight from the country. One focus should be on reversing this capital flight by bringing permanency in the stabilisation and implementing a reform programme. Without doing so, near zero current account deficit and low economic growth could become a new normal.
Copyright Business Recorder, 2024
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