Moderation in C/A deficit

The current account (C/A) deficit of Pakistan during 2018-19, though lower than last fiscal year's, continues to pose a serious challenge to country's economy. According to the latest data released by the State Bank, the C/A deficit of the country narrowed to dollar 13.59 billion in July-June, FY2019 compared to dollar 19.90 billion in the same period of FY18, depicting a decline of about 32 percent or dollar 6.31 billion. In terms of GDP ratio, the deficit stood at 4.8 percent of GDP during FY19 as against 6.3 percent in the previous year. Component-wise, cumulative deficit of goods and services account and income sector fell by 12 percent or dollar 5.15 billion to dollar 38.23 billion compared to dollar 43.38 billion in FY18. With dollar 24.22 billion of exports and dollar 52.44 billion of imports, goods' trade deficit stood at dollar 28.22 billion during FY19, down from dollar 31.82 billion last year while deficit on services account came down by dollar 1.8 billion to dollar 4.27 billion. However, primary income account remained under pressure due to higher interest payments. Its deficit rose to dollar 5.7 billion in FY19 compared to dollar 5.4 billion a year earlier. The deficit on the above components of C/A was neutralized substantially by an inflow of a record amount of dollar 21.84 billion in home remittances which rose by dollar 1.93 billion during the year.
A closer look at data reveals that exports of the country shrank by 2.2 percent or dollar 500 million during FY19 despite a massive devaluation of rupee. Imports, however, declined by a higher margin of 7.3 percent due mainly to the fall in the imports of energy-related products and machinery as the early harvest phase of the CPEC draws to an end, followed by easing of oil prices and restrained imports of LNG. The capital account showed rising external indebtedness of the country which soared by a massive amount of dollar 12.05 billion during FY19 compared to dollar 8.86 billion in FY18. Of course, such a sharp rise in external indebtedness would have severe implications for the economy, particularly for debt servicing of the country and its external sector. Anyhow, an improvement in C/A balance of the country during 2018-19, after a sharp deterioration in the preceding year, is a positive development for the country. Hopefully, if exports of the country also show a positive trend as is expected due to substantial devaluation of exchange rate of rupee, C/A deficit would shrink further and possibly to a sustainable level in the not too distant future. Another healthy development is the successful negotiation of an EFF programme with the IMF. The approval of the Fund programme is sure to encourage foreign investors to invest in the country and increase the chances of financial inflows from other bilateral and multilateral sources. Besides, the country is obliged to undertake necessary reforms under the IMF arrangement which would not only help balance the external sector accounts on a sustainable basis but also work towards stabilising the economy and putting it on a growth trajectory on a long-term basis. International credit rating agencies also look at the country more favourably if it is pursuing a reform agenda under an IMF programme.
Needless to say that the present government had inherited a foreign sector which was facing a record deficit and the country was almost on the verge of insolvency. Keeping the gravity of the situation in view, the PTI government had to impose/increase regulatory duties on imports, devalue the Pak rupee substantially, introduce certain measures to increase home remittances through banking channels, request the friendly countries to lend a helping hand to the country and negotiate a programme with the IMF. Some of these steps were taken at a great political cost as the PTI government was criticised and often ridiculed for extending a begging bowl of a bigger size and letting the IMF-dictate economic policies to a sovereign country. Nonetheless, the present government's concerted efforts have finally yielded results in the form of a reduced C/A deficit during FY19 but this is not enough. The authorities of the country have to keep a very close watch on the evolving external sector situation and be ready to undertake appropriate policy actions to ensure that the C/A deficit is reduced to a level which could be financed through autonomous inflows and without making extra efforts to bridge the gap in the external sector.