The State Bank of Pakistan (SBP) revealed a massive deterioration in the current account (C/A) deficit - 6.13 billion dollars in July-March 2017 in comparison to 2.35 billion dollars in the comparable period of last year; or a decline of 160.7 percent. SBP sought to justify this rise by stating that it is natural to expect some widening in the current account deficit when the economy is taking off but warned that it needs to be contained to sustainable levels. The disturbing aspect of these figures is that if this trend continues C/A deficit by the end of the fiscal year (July-June) would be around 8 billion dollars.
The major contributor to a rise in C/A deficit has been a sustained fall in dollar earning activities, mainly exports and remittances, while imports, an expenditure item, remained high.
Exports and remittances have been declining for sometime. While a decline in remittances is attributed to external factors notably the recession in the Middle Eastern countries, prompting them to lay-off foreign workers - a region where a large number of our emigrant workforce is based, yet the decline in exports can be laid at the doorstep of economic policies supported by the Ishaq Dar-led Finance Ministry. An overvalued rupee during a time when other countries, including our competitors India and China, have been depreciating their currencies significantly to make their products attractive in world markets, has accounted for a decline in our exports as our products are no longer competitive in world markets. The reason for this economically extremely flawed decision has been Ishaq Dar's focus on understating the annual interest and principal payable as and when due to external borrowers as well as the Prime Minister's misperception that a stronger rupee reflects a robust economy. The result: a steady decline in exports with exporters pointing out correctly that once an export contract is lost it is very difficult to get that particular buyer to, once again, become a client. In addition, the delay in refunds accounts for liquidity issues for our exporters who were compelled to borrow which further raised their costs of production.
Imports, on the other hand, have remained more or less constant between July-June 2013 estimated at 40.36 billion dollars to 40.45 billion dollars in July-June 2016. This however was in spite of the fact that while in 2013 imports of petroleum products accounted for 14 billion dollars, a period when the international oil price was very high, in 2016 when prices had plummeted only 8.35 billion dollars were allocated for importing oil and products.
So which import items increased? The Ministry of Finance is at pains to insist that machinery imports rose, however, the rise in machinery imports accounts for 2.24 billion dollars between 2013 and 2016, transport (including buses and trucks) account for 155 million dollars between 2013 and 2016. Or in other words, the decline in imports of petroleum and products estimated at 5.65 billion dollars (between 2013 and 2016) are accounted for by a rise in machinery and transport imports of 2.385 billion dollars, less than half the decline in petroleum imports.
The Finance Ministry has been meeting the country's foreign exchange requirements due to a widening current account deficit through massive borrowing. In recent months, with a dramatic decline in programme lending/budget support subsequent to the completion of the International Monetary Fund programme as other lenders - bilaterals and multilateral - confidence level with our adherence to the reform agenda has been compromised, the government has begun to rely on commercial borrowing from abroad which is procured at a higher rate of interest and a lower amortisation period.
One would urge the government to urgently revisit its economic policies though unfortunately the Finance Minister resisted all previous warnings by Business Recorder that its flawed policies would lead to a widening of the current account deficit. However, one would hope that now that the disturbing picture has emerged the government would pay heed to some sane advice.
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