Jump in C/A deficit

Continuous increase in current account (C/A) deficit has become the biggest challenge to economic managers of the country. According to the latest data released by the State Bank, the country's C/A deficit has reached the historical level of dollar 15.96 billion during July-May, 2018 compared to dollar 11.14 billion in the same period of last year, depicting an increase of dollar 4.82 billion or 43 percent. A detailed analysis has shown that cumulative deficit of goods, services and income accounts had surged by 18 percent or dollar 5.63 billion to dollar 37.50 billion in the first 11 months of FY18, up from dollar 31.87 billion in the same period of last year. With dollar 50.72 billion of imports and dollar 22.78 billion of exports, the country's merchandise deficit surged to dollar 27.94 billion in July-May of FY18 as against dollar 23.45 billion in the corresponding period of last year. Similarly, income sector deficit also witnessed an upward trend, rising to dollar 4.83 billion with dollar 5.48 billion of payments and dollar 64.8 million of receipts.
A sharp deterioration in C/A deficit during FY18 is of course a highly disturbing development and has been highlighted repeatedly by independent economists, multilateral institutions and rating agencies. The latest to warn the country was Moody's whose decision to downgrade Pakistan's rating from stable to negative B3 will further scare away foreign investors and make it difficult for Pakistan to borrow from foreign sources at reasonable rates. Anyhow, a higher current account deficit and slow foreign inflows has forced the country to utilize its foreign exchange reserves which dropped from dollar 21.3 billion in June, 2017 to dollar 17 billion in June, 2018. Forex reserves held by the central bank are nearly dollar 10 billion or equal to about 2 months of imports. This is a dangerously low level and would force the country to borrow from abroad in the very near future. Reluctance on the part of bilateral sources to lend to Pakistan at reasonable rates would probably leave no option for this country but to borrow from the IMF who could prescribe harsh and upfront conditionalities to rescue the country from a very tight position. The ability of policymakers to make good projections may also be questioned. It is quite clear by now that C/A deficit may be well over dollar 17 billion or between 5 and 6 percent of GDP for 2017-18 whereas the target was only 2.6 percent of GDP for the year.
The widening C/A deficit would not only wipe out foreign exchange reserves of the country but would also have a negative impact on the exchange rate of the local currency which has already lost over 16 percent of its value against the US dollar during the past six months. Prices would also come under pressure and budget deficit would increase since more rupee resources will be required to buy foreign exchange for external debt servicing. Ultimately, a time could come when Pakistan would be nearly insolvent and find it difficult to import machinery and other raw materials to keep the wheels of industry moving. The problem has been further compounded by the rise in oil prices in the international market and increased supplies of machinery and other inputs under the CPEC. The government has taken certain measures like imposition of regulatory duties on some non-essential items, PM's package to increase exports and substantial devaluation of the rupee to arrest the deteriorating trend but so far these measures have not yielded the desired results. For instance, C/A posted a deficit of nearly 2 billion dollar in the last two consecutive months. This is of course not a sustainable situation and Pakistan has no other option but to think about ways to increase exports, drastically contain imports and raise the level of home remittances not only to have a proper balance in the foreign sector but to find enough foreign exchange to service the rising level of outstanding external debt. The caretaker Finance Minister is rightly worried about the deteriorating situation in the external sector but cannot probably do much, given the time constraint and the kind of authority she enjoys in an interim set-up.