Steep rise in C/A deficit

It is disquieting that current account (C/A) deficit of the country has almost doubled during the first two months of the current fiscal year. According to the latest data released by the State Bank on 21st September, 2016, C/A deficit of the country has swelled by over 90 percent to dollar 1.316 billion during July-August, 2016 as compared with dollar 686 million in the corresponding period last year. So far as the components of current account balance were concerned, combined deficit of goods, services and income accounts surged to dollar 4.914 billion in the first two months of 2016-17 as compared to dollar 4.261 billion in the same period of last year. With dollar 6.969 billion of imports and dollar 3.221 billion of exports, country's merchandise account deficit stood at dollar 3.748 billion as against dollar 3.3 billion last year. Services' deficit posted an increase of 138 percent with exports of dollar 1.33 billion and imports of dollar 713 million. Similarly, with payments of dollar 611 million and receipts of dollar 64 million, income sector deficit shot up to dollar 547 million. It is obvious that if the present trend continues, C/A deficit of the country could reach dollar 7-8 billion during the current year which would be much higher than dollar 3.13 billion recorded in 2015-16.
There is absolutely no doubt that a steep rise in C/A deficit would have highly negative implications for the economy. In order to finance such a huge deficit, the country would have either to resort to further external borrowings at high interest rates or deplete its foreign exchange reserves and both these options would have serious repercussions for the economy. The PML (N) government has already borrowed heavily from outside sources during its tenure and further borrowings could push the country into a "debt trap" and put the future generations under a heavy strain for none of their fault. Depletion of foreign exchange reserves would lead to depreciation of rupee, inflationary pressures, tightening of monetary policy, etc. If the latter option is availed, a stage could be reached where the country would find itself unable to meet its payment obligations and obliged to reduce the level of imports of all kinds drastically. Even otherwise, the present level of foreign exchange reserves is not too high to take a hit for a long period of time. More worrying aspect is that it looks difficult to arrest the deteriorating trend in C/A balance in the coming months. Country's exports are dwindling fast and there is almost no policy strategy in place to reverse this trend. The trade deficit of the country could have been even higher if the oil prices were at the level of two years ago. Oil prices have plunged from well over dollar 100 a barrel in mid-2014 to the present range of dollar 40-50 per barrel and the country saved over dollar 4 billion in oil imports during the previous fiscal year. One can well imagine the consequences for current account balance if oil prices in the international market resume their uptrend once again. Workers' remittances were a huge support but they have tended to stagnate due mainly to loss of jobs in the Middle East. Foreign direct investment (FDI), which was already at a dismally low level, has declined further and this would have a negative impact on the productivity of the economy and the balance of payments. The inflows from Coalition Support Fund (CSF) have almost ended while the country has to meet payment obligations to the IMF, Paris Club and sovereign bond investors. The sad aspect is that while the indications of a gathering storm in the external sector are pretty obvious, country's policymakers appear to be least bothered by the evolving situation. They continue to boast about the present level of foreign exchange reserves and the stability in exchange rate without thinking that these gains could be temporary if appropriate measures were not taken in time to enhance productivity of the economy and expand exports which at present are even less than half of the imports. In our view, the government needs to take a very serious note of the evolving situation with a view to undertaking appropriate measures like depreciation of rupee to narrow the widening trade gap. Adjustment in the currency rate should be used as an important instrument of policy without any further loss of time.