Narrowing of C/A deficit

It is a matter of relief that the current account (C/A) deficit of the country has improved during the first seven months of the current fiscal year compared to the same period last year. According to the latest data released by the State Bank on 19th February, 2015, C/A deficit was lower at dollar 2.307 billion during July-January, 2015 as compared to dollar 2.537 billion registered in the corresponding period of FY14, showing a decline of about 9 percent. Improvement in the external sector account was due mainly to a record level of home remittances amounting to dollar 10.3 billion and a fall in the deficit of services sector. With export of services increasing to dollar 3.16 billion from dollar 2.77 billion a year ago, and imports at almost the same level of dollar 4.6 billion, the services' sector deficit narrowed to dollar 1.461 billion from dollar 1.827 billion in July-January, 2014. On the other hand, imbalance in the merchandise account rose to dollar 10.696 billion compared to dollar 10.109 billion a year earlier due to poor export performance and increase in imports. Foreign Direct Investment (FDI) into the country also fell slightly to dollar 545 million from dollar 553 million in the first seven months of the previous fiscal year. Nonetheless, a complete turnaround in the C/A position from a substantial surplus of dollar 226 million in December, 2014 to a deficit of dollar 95 million in the latest month ie January, 2015 was a negative development, worthy of close examination and appropriate policy response. Overall, however, the country seems to be headed towards a relatively better performance in the external sector this year. While growth in overseas remittances continues to be strong, oil prices in the international market are expected to hover around the present low level. Food imports should also be lower due to better domestic supply position and reduced prices. Most of the growth in imports continues to be concentrated in machinery and other industrial inputs, which are not only likely to increase the development potential of the economy but could also expand employment opportunities in the country.
While welcoming a modest fall in the C/A deficit, it needs to be stressed that though extent of the deficit is lower compared to the previous year, it is still too large to leave the economic managers of the country in a comfort zone. In fact, foreign exchange reserves would have declined considerably and the Pak rupee would have come under a great deal of pressure if the country had not received dollar 1.1 billion from the IMF and raised dollar 1.0 billion from the international market through the issuance of sukuks, which have to be repaid with interest. The country had to pay about dollar 7 billion in debt servicing last year and the payments could rise further on this account if the country continues to manage its external sector on borrowed time. At present, the State Bank holds about dollar 10 billion in foreign exchange reserves but these could evaporate pretty quickly in the absence of inflows from unrequited sources. In order to have a sustainable position in the external sector, it is imperative to act on several fronts. As the basic problem in the current account is the current stagnation in exports, all-out efforts need to be made to increase the productivity of the economy by ensuring uninterrupted supply of energy, ending militancy in the country and removing other barriers to production of goods and services. At the same time, it is vital to maintain competitiveness of exports through appropriate and timely adjustment in exchange rate of the rupee. This is not only essential to increase the level of exports but also to contain imports, particularly of consumer goods and luxury items. PRI could also be reviewed to block unofficial channels and reroute most of the home remittances through the banking system. Also, important is the meeting of commitments made to the IMF under the EFF to maintain the flow of resources from multilateral financial institutions and enhance the confidence of foreign investors in the solvency of the country. Foreign investors are still very reluctant to tie their fortunes with the country as suggested by the latest data despite repeated assurances by the Prime Minister and the Finance Minister of the safety and repatriation of their capital. Another important area to consider is the possibility to only negotiate for soft loans like those from the IMF and refrain from high cost borrowings through sukuks, bonds etc. This makes sense because the funds raised through high cost borrowings are generally invested with the banks at a much lower rate by the SBP. The country does not need to incur losses on this account especially when it has comfortable level of foreign exchange reserves. Since the C/A deficit is still large and needs to be reduced to a manageable level, policy makers of the country should not be complacent about it but make concerted efforts to remove the structural imbalance in the foreign sector at any early date.