Swelling of C/A deficit

Foreign sector of the country is coming under increasing pressure. As reported by the State Bank on 22nd August, 2014, current account balance (the best indicator of a country's external sector position) was in the red by as much as dollar 454 million in the first month of FY15 (July, 2014) as compared with the deficit of only dollar 125 million in the corresponding period of last year, depicting an increase of dollar 329 million or 263 percent. Deficit was also much lower at dollar 135 million in June, 2014, which means a surge of dollar 319 million in a single month. Country's trade deficit during July, 2014 stood as high as dollar 1.9 billion as imports at dollar 3.8 billion exceeded exports amounting to dollar 1.9 billion by a very high margin or in other words, imports were double the level of exports. Compared to the corresponding month of 2013, trade deficit was higher by about dollar 0.63 billion or 51 percent. With dollar 328 million of exports and dollar 603 million of imports, services sector deficit stood at dollar 275 million while income deficit amounted to dollar 186 million due to outflows of dollar 226 million and inflows of only dollar 40 million. Although it is too early to make even a rough kind of estimate, yet if the present trend continues, current account deficit of the country during FY15 could amount to over dollar 5 billion, which would be sharply higher than a deficit of dollar 2.97 billion during 2013-14.
The opening of the year FY15 with such a negative note so far as current account balance is concerned, indeed is a very bad news for the country. Evidently, political uncertainty in the last few months has contributed to the widening of the deficit during July 2014. As the situation has turned much uglier over the last few weeks, the trend in the subsequent months could worsen further. Loss of SBP reserves, depreciation of the exchange rate of the rupee, strengthening of inflationary expectations and disruption of economic activities witnessed recently are some of the manifestations of the deteriorating trend in the external sector. Of course, if this trend is not arrested soon, not only these variables would continue to be affected adversely but the prospects of growth would also be undermined, which would have far-reaching implications for employment and poverty levels as well as for investors' confidence and credit rating of the country. The worrying aspect is that enhanced productivity in the economy and increase in exports, which could bring a sustainable improvement in the C/A balance are still held hostage to adverse factors like acute energy shortages, lawlessness, corruption, war on terror and political uncertainty. Rising political tensions in the country, especially the recent antics and belligerent attitude of the marchers and revolutionaries, in Islamabad give the perception of a banana republic to the country to foreigners who may now be loathe to even visit, invest and deal with the businessmen of the country. These latest negative developments could darken the prospects of a turnaround in the C/A balance further, forcing the country to draw down its reserves or borrow more from abroad and increase the debt servicing enormously in the coming years. The alarming aspect is that autonomous inflows in the form of foreign investment etc have almost dried up and the country is poised to rely increasingly on expensive foreign borrowings. IMF has also delayed its tranche which was due this month. If the turmoil now engulfing the country is not properly tackled and the Fund is not supportive, foreign exchange reserves held with the SBP could deplete to a risky zone in the coming months with all the attendant consequences.
Unfortunately, the government continues to brag about the improvement in the external sector and does not seem to be prepared to take appropriate measures to reverse the worsening trend. In a situation like this, all-out efforts are needed to be made to increase productivity in the economy to generate exportable surpluses, contain domestic demand through a tight fiscal and monetary policy and ensure competitiveness in the international market by strictly adhering to a flexible exchange rate policy. While the impediments to enhancing productivity and adopting a stringent fiscal policy are understandable in the present circumstances, sticking to a particular exchange rate and boasting about this is beyond comprehension. The Finance Minister should not make it a matter of prestige because consequences of such a flawed policy could be disastrous in the long run. We usually appreciate Chinese policies but can't follow its example of keeping its currency deliberately undervalued despite stiff opposition from all over the world. Overall, the government needs to move very fast on a number of fronts to reverse the present trend and ensure a sustainable position in the C/A balance in the medium to long-term. Failing this, the pressure on the foreign sector could increase, threatening the solvency of the country and jeopardising its future.