C/A deficit challenge

According to the latest data released by the State Bank on 23rd December, 2014, current account (C/A) balance of the country posted a deficit of dollar 2.345 billion during July-November, 2014 which was higher by dollar 200 million or 9.0 percent than dollar 2.145 billion registered in the same period last year. Rising C/A deficit was mainly due to a drop of dollar 198 million in exports and a surge of dollar 1.035 billion in imports. It may be noted that imports at dollar 18.55 billion during the first five months were almost double the level of exports at dollar 9.94 billion. During July-November, 2014, exports of services, however, increased by dollar 373 million to dollar 2.376 billion while imports remained almost static at dollar 3.372 billion. Last year, imports of services were dollar 3.11 billion. The country earned dollar 735 million from logistic support while it had received dollar 322 million under the same head in the same period last year. Taken together, gap between imports and exports of goods and services during July-November, 2014 period stood at dollar 9.6 billion compared to dollar 19.2 billion in FY14, which was significantly higher than the gap of dollar 16.9 billion in FY13. Month-on-month basis, Pakistan also recorded a much higher deficit of dollar 475 million during November, 2014 as compared to dollar 223 million in the same month last year, registering a rise of dollar 252 million or 113 percent.
While the widening of C/A deficit during July-November, 2014 is indeed a matter of concern, it is very difficult to project its trend in the medium- to long-term because of certain factors likely to have a strong impact on the final outcome. Major uncertainty is, of course, related to the behaviour of oil prices in the international oil market. Considering falling oil prices, the oil import bill, which stood at dollar 14.7 billion in FY14 could fall significantly in the remaining period of FY15. If the oil prices remain around dollar 60 per barrel, total bill for FY15 could be about dollar 10 billion, which would be a great help in reducing the trade imbalance as well as C/A deficit. The recent announcement by Saudi Arabia that it would not curtail its oil output even if the oil prices drop to dollar 20 a barrel shows the growing fissures in the OPEC and other oil producers, which could destabilise the market beyond present expectations. However, while declining oil prices would help in improving the trade balance, its impact on home remittances could be somewhat negative. At the same time, Pakistan may benefit from falling commodity prices in the international market that could reduce the import bill further. The prevailing low cotton prices could help the textile industry boost exports and earn more foreign exchange. A reduction in power tariff as well as a cut in the State Bank's policy rate would also reduce the cost of production and increase exports. It may be added that a further cut in the policy rate is also expected next month. On the other hand, energy shortages, lack of investment and uncertainty caused by militancy and war on terrorism may continue to take its toll and not let the country avail the opportunity to expand its output and exports by a handsome margin. Government's logistic support for Nato forces in Afghanistan may also come to an end next year, depriving the country of a regular source of foreign earnings.
Speaking objectively, the present attitude of the government towards the evolving situation in the current account balance appears to be more troubling than the actual or projected developments in this area. It regularly boasts about the present level of foreign exchange reserves and the stability of exchange rate of the rupee without realising that these favourable developments are due mainly to borrowings from all kinds of sources at a higher cost. Of course, foreign exchange reserves have now crossed the mark of dollar 15 billion and the country is presently comfortably placed to pay for its imports and external debt but this was possible only due to the receipts from the Eurobond, Sukuk and the IMF, which have to be repaid with interest. The country may face pressure on the external sector account as major debt payments to the Paris Club and the IMF, are due in FY17 and FY18, and would consume a major chunk of forex reserves. In a situation like this, authorities of the country need to be more careful; they are required to frame appropriate policies and ensure their effective implementation, especially for expansion of exports and maintaining the present trend in home remittances. Exchange rate should also not be made an issue of prestige but this instrument could be utilised to bring a lasting improvement in the C/A balance. It may be recalled that in the past, complacency on the part of the authorities, when the going was good, had forced the country to rejoin the IMF programme on more stringent terms to rebuild the depleting foreign exchange reserves and avoid default. It would be better to shun such a possibility in future.