C/A: Myths and realities

"Damned if you do, damned if you don't," someone who should be credited for having current account surplus rightly said on the so-called media bashing upon having one-month current account surplus after four years. A few months back everyone was saying that there is no significant reduction in current account deficit despite currency depreciation and interest rate hike, and now when the proof is in the pudding, everyone is an economist to differentiate between good and bad current account deficit or surplus. Just a few days ago, everyone was a chef recommending recipes of chicken karahi without tomatoes.

There are two lessons to learn. First, not everyone is expert on everything, and people should refrain from commenting on what they don't know. The other lesson is to do away from the mindset of criticizing your opposition, even when the ground realities are stark opposite to what you say- one may lose credibility in the process. PM IK used to do this when he was in opposition, and now all the other stakeholders have joined against him, and are doing it in an ugly form. For those who are actually confused on what kind of current account position is good for us. It is worth mentioning that economies like Germany, China and Singapore are running current account surpluses, and even Pakistan's new aspiration Vietnam is running current account surplus. But that does not mean current account deficit is always bad.

Economics is a complex subject and variables have varying implications in different scenarios. There is no absolute right or wrong in economics. People within government, media and opposition who do not have expertise (or even basic knowhow) on the subject should refrain from commenting on the matter for their own and country's good. When everyone starts talking about technical subject, they are prone to make mistakes, and readers and viewers get confused.

In the last few weeks this writer has noticed that even experts on the matter have confusion on balance of payment (BoP) components and they mix up the current account and financial/capital account which together form the BoP. One of the leading economics schools' head of the department is not clear on deferred oil payment mechanism in BoP. A senior chartered accountant was not clear on difference of imports recorded by State Bank and Pakistan Bureau of Statistics, and in naivety, he was informally challenging that current account surplus is wrongly computed.

And the most common mistake seen lately by a number of commentators is mixing portfolio investment in government papers (aka hot money) with current account surplus. Some are asking for clarity, a few are making mistakes unintentionally, and others may be fueling the fire to make good news look bad. The idea here is to spell out simple concepts.

First, the deferred oil facility from Saudi Arabia is shown fully on import bill within current account. The counter entry is made in financial/capital account. The net impact on BoP is zero. It is like account payable recorded in balance sheet while the cost is booked in profit and loss statement. Hence, the current account surplus includes the oil imports from Saudi Arabia. The second point is on portfolio investment, it is recorded in financial/capital account and has nothing to do with current account. Hence, the current account is surplus in October, irrespective of whatever amount is pouring in government papers by non-resident Pakistanis.

Now coming to the point whether current account surplus is good or bad. Some say that in developing countries, running a deficit is not bad. That is true - think of a student taking loan for tuition fee, and in a few years, having acquired the skill, he will be able to pay it back. Today at the age of 20 - his current expenses are more than income - he runs a deficit, and financed by a bank or someone. In future, when he earns more than what is needed, he pays loan back and runs surplus for future. A similar analogy can be run for a new company that takes loan for capital expenditure.

But what if someone takes loan for consumption at young age and does not spend it on skill development or a company takes loan to consume on directors' personal expenses, rather than building necessary infrastructure (plant and machinery). How will an individual or company pay back the loan?

The then finance minister Ishaq Dar's philosophy was that it is fine to run current account deficit as we would keep on borrowing and eventually the economy will become too large to make these deficits irrelevant. But it was delusional. The loan taken today can only be paid back sustainably by creating exportable surplus or having large consistent remittances flow to finance growing consumption based imports. That was not happening, and even the investment made in the last 10 years was for market seeking - to meet the domestic demand. Exports as percentage of GDP fell by from 12 percent in 2005 to 8 percent in 2017 while imports are up from 15 percent to 18 percent. The gap increased from 3 percent to 10 percent. Home remittances increased from 3.5 percent to 6.4 percent - not filling all the gap.

The trend was visibly unsustainable and last year, when the current account deficit reached a mammoth level of $2 billion a month, country reserves were falling like nine pins. There was no other way in short term but to curb imports to lower the current account deficit, and to take the country out of balance of payment crisis.

Copyright Business Recorder, 2019