The widening C/A deficit

It is very depressing that current account (C/A) deficit of the country has almost doubled during the current fiscal so far. According to the latest data released by the State Bank, country's C/A balance recorded a deficit of $2.601 billion during July-November, 2016 as compared with $1.362 billion in the same period last year, depicting an increase of $1.24 billion or 90.96 percent. The overall deficit was primarily driven by the widening gap in the merchandise account and slower foreign inflows. A detailed analysis showed that cumulative deficit of goods, services and income accounts rose by $953 million or 9 percent to $11.8 billion in the first five months of the current fiscal year as against the deficit of $10.874 billion in the corresponding period of last year. The deficit on goods stood at $8.62 billion with $8.708 billion of exports and $17.328 billion of imports as against the deficit of $7.583 billion last year. Services' sector deficit rose by $403 million to $1.399 billion compared to $996 million last year while income sector deficit, with $2.025 billion payments and $245 million receipts, fell to $1.781 billion during July-November, 2016. The position of C/A deficit was also very unhealthy during November, 2016 as deficit during the month skyrocketed to $839 million compared to $381 million a month earlier.
A sharp increase in the C/A deficit during the current year is a highly disappointing development for the country. It may be mentioned that C/A deficit of the country had amounted to $3.3 billion or about 1.2 percent of GDP during FY16 which was only slightly higher than $2.7 billion a year earlier and was comfortably financed through sources such as doubling in net FDI and IMF disbursements. External borrowings by government too played a role in this regard. If the present deteriorating trend in C/A deficit continues to persist, it could be as high as more than $6.0 billion during 2015-16 which would be difficult to finance due to dwindling exports, an alarming decline in FDI, a woeful slowdown in home remittances and no IMF programme. Such a high level of deficit would of course have negative implications for the economy as such a large deficit could only be plugged by resorting to heavy external borrowings at exorbitant interest rates or through the depletion of foreign exchange resources of the country. Both these options are unpleasant. Pakistan has already borrowed heavily from outside sources and it would be very hard to meet the debt servicing obligations associated with even the present outstanding debt. Narrowing the C/A gap through the depletion of foreign exchange reserves of the country would not only destabilise the foreign exchange market and put pressure on the rupee rate but stoke inflation. If appropriate action is not taken in time, we could reach a stage where solvency of the country could be threatened. Unfortunately, the factors which could turn around the external sector accounts are not favourable to Pakistan at present. Home remittances which provided a big support to the C/A have stagnated and are not likely to pick up anytime soon due to lower infrastructural development in the Middle East, particularly in Saudi Arabia, due to lower oil prices in the international market. Another potent factor in slowing down home remittances is the widening gap between the official and unofficial rates of the rupee. It is just a matter of common sense that overseas workers who have earned foreign exchange through hard work will not like to remit their hard-earned money through banking channels if the gap between the two rates is as wide as three rupees to a dollar and black market channels are also as quick and reliable as the banking channels. There was a time when the authorities were very optimistic about the growth in exports and talked enthusiastically about the Vision 2025, targeting $150 billion exports by 2025. Now, that is off the air. Enhancement in productivity is impeded by lack of greater technological diffusion, managerial excellence and economies of scale, energy shortages, etc, while competitiveness of the economy has been harmed due to the unwillingness of the government to depreciate rupee. The incoming FDI, whatever its level, is not export-oriented but focused on increasing domestic consumption. The irony is that the just concluded IMF programme which was supposed to improve the external accounts through a number of structural reforms and pave the way for sustainable development seems to have failed miserably to meet the prescribed targets of the programme and policymakers of the country seem to be least bothered about it. We would urge upon the government to do something seriously to reverse the present deteriorating trend in the C/A balance without any further loss of time. Any complacency could again land the country on the doorsteps of the IMF.