Fall in C/A deficit

It is a matter of great satisfaction that current account (C/A) balance of the country continues to depict improvement during the current fiscal year. According to the latest information available from the State Bank of Pakistan, current account has posted a deficit of only dollar 2.843 billion during the first eight months of the current fiscal (July-February, FY20) as against dollar 9.817 billion in the same period of last year, depicting a decline of dollar 6.974 billion or 71 percent. The deficit on merchandise, services and income accounts stood at dollar 19.378 billion in the first eight months of FY20 as compared to dollar 22.567 billion in the corresponding period of last year, showing a decline of dollar 3.18 billion. The trade deficit of the country, with 35 percent contraction in imports and expansion of 3.62 percent in exports, posted a deficit of dollar 13.217 billion in July-February, 2020 compared to dollar 20 billion in the same period of last fiscal year. With dollar 3.7 billion of exports and dollar 6.06 billion of imports, services sector recorded a deficit of dollar 2.363 billion, down from dollar 2.63 billion last year while income sector inflows were only dollar 423 million against the outflows of dollar 4.221 billion, resulting in a deficit of dollar 3.798 billion. The inflows of home remittances posted a growth of 5.4 percent to reach dollar 15.127 billion, supporting the C/A balances in a big way. On a month-on-month basis, the C/A deficit shrank by 60 percent to dollar 210 million compared to dollar 534 million in January, 2020.
A huge decline in the C/A deficit of the country is of course a very healthy development for the country, especially when successive deficits over a prolonged period had dented our hopes for such a positive outcome and the country was on the verge of default only about a couple of years back. Needless to say that such an improved position in C/A balance of the country would reduce the need to borrow from outside sources, help maintain foreign exchange reserves at an adequate level and stabilise or improve the exchange rate of the rupee to contain or reduce the inflation rate to a certain extent. Besides, foreign investors would feel more comfortable about the solvency of the country and the State Bank of Pakistan would now be less inclined to raise the policy rate to induce the households and other investors to keep their rupee holdings in the local currency. Indirectly, the authorities of the country would feel more confident in dealing with the IMF although its support will still be necessary to pursue the present reform agenda, stabilise the economy and ensure constant flows of foreign funds from outside sources into the country.
However, while latest developments in the foreign sector are certainly welcome, there are still certain question marks about the sustainability of such a trend. The level of imports continues to decline because the economy, especially the industrial sector, is performing poorly. As soon as the economy picks up momentum, imports are likely to witness a sharp growth and increase the gap in the merchandise account. Also, there is some uncertainty over the pace of workers' remittances after a huge decline in the international prices of oil and economic slowdown activity in the host countries. Besides, the government needs to be mindful about certain other recent developments which could affect the C/A balance in either way. The crude oil prices in the international market have dropped from about dollar 61.5 per barrel in December, 2019 to the current level of about dollar 24 per barrel. The overall improvement will depend upon the level of crude prices and the duration of low prices, yet the impact on the C/A balance is likely to be positive, at least in the short-run. Secondly, exports are likely to remain stagnant as Coronavirus-related shut-downs have slowed down industrial production all over the world. We, however, feel that the recent improvements in the C/A balance have given our policymakers an opportunity to take stock of the situation and continue to analyse the related developments in an impassioned way to make right policy choices.