The current account balance of Pakistan was mostly in deficit up to 1990s due to payments exceeding receipts in the external sector and this state of affairs resulted in a number of problems, including depreciation of the rupee, frequent resort to external sources of borrowings and increase in the debt servicing burden of the country.
However, the situation changed after 1999-2000 due to several favourable factors and the current account balance registered surpluses for the next four years. This led to stability in the exchange rate, accumulation of reserves and the disappearance of the threat of default. The year 2004-05 has, however, again witnessed a worsening of the situation.
According to the latest State Bank figures, the current account deficit shot up to 1.526 billion dollars during the year which meant a deterioration of more than 3.3 billion dollars from the surplus of 1.81 billion dollars in 2003-04.
This was due mainly to a huge trade deficit of 4.523 billion dollars during 2004-05 as compared to only 1.279 billion dollars in the preceding year. Such a widening of trade deficit was caused primarily by a very sharp increase in imports, unaccompanied by a similar rise in exports.
The reversal in the external sector trend, though somewhat disturbing, could have been regarded as an ordinary matter if the authorities of the country had accepted the change in situation as an unfavourable development and tried to undertake offsetting measures.
For example, exchange rate and fiscal and monetary policies could be manipulated to discourage imports or promote exports. However, policy makers of the country seem to be in a different mood. They continue to insist that the recent rise in imports is basically due to a sharp increase in the import of machinery and capital goods which would spur growth and improve the export potential of the country.
Their argument would have been entirely valid if all the imports of machinery and capital goods could have been utilised to enhance the productive capacity of the country. However, on a closer scrutiny of the data, that does not appear to be the case. For instance, "machinery group" imports during 2003-04 rose by 23.9 percent to 3.6 billion dollars due mainly to higher imports of road motor vehicles, textile machinery and other machinery. Road motor vehicles imports recorded a growth of 30.2 percent on account of substantial increase in the imports of motorcars, accessories and parts of motorcycles, etc.
During July-March 2005, the imports of road motor vehicles were up by 225 million dollars or 47 percent. It may be mentioned that all CKD kits also come under this category. One would only wonder how these imports would increase the repayment capacity of the country.
This is not to say that the import of road motor vehicles or other goods which do not strictly fall under the category of machinery or capital goods should be discouraged or banned but only to emphasise that one needs to think objectively and impartially before giving a positive spin to the developing trend in the external sector data.
Obviously, the steep increase in the import of road motor vehicles would contribute to a higher level of consumption and discourage savings, which is not in the long-term interest of the economy. Also, it would lead to higher level of demand for petroleum products and increase the import bill of the country. Besides, higher level of bank financing for the purpose would result in sub-optimal use of scare financial resources of the country.
In short, while it would be in order for the policy makers to analyse the phenomenon of bulging imports more carefully and prudently, the overall data on imports also needs to be reclassified in a manner so as to highlight its end use under various categories in a way that is easily decipherable and understood by majority of the people.