The current account deficit crossed $2 billion in July, while the financial and capital accounts could only fetch $0.5 billion to leave the gap of $1.5 billion. At this pace, the full year deficit could cross 6 percent of GDP. Contradicting the official line, BR Research opines that higher imports are not purely due to machinery imports which are termed as healthy.
The machinery imports, according to SBP data, are up by 11 percent in FY17 while rest of imports increased by 19 percent. It is the consumption boom that is primarily driving high imports.
The currency has kept artificially pegged which has made imports cheaper. This whilst domestic economic growth has pumped up the demand of goods, especially petroleum products and the transport group, to unprecedented levels. The need of the hour is to curtail demand through policy measures.
The annual petrol consumption in volume terms doubled in FY17 from the levels of FY13 while HSD increased by a quarter. The low prices have resulted in higher consumption while the local refineries production is thinned.
It is imperative to increase the prices—the optimal way to do so is to increase the petroleum levy (PL) which is not part of divisible pool and that would also help in reducing the fiscal deficit which too is expected to grow disproportionately in FY18.
The curtailment of imports should not be confined to petroleum products. The food imports increased by 18 percent in FY17 and constitute 11 percent of total imports. Transportation group imports are up by 42 percent. The economy is showing real growth amid easing monetary and exchange rate policies have enhanced consumer demand.
On the flipside, domestic production is not matching demand as exports struggle to grow. The outcome is burgeoning current account deficit.
True, the inflation is low and economy is growing at a decent pace. On the surface, it appears that dovish stance should continue. But the way current account has slipped in the last few months, the day is not far when forced tightening would be the only option to deal with the mess.
The need is preempt the situation and the new cabinet should have a proactive approach. The administrative measures taken by Dar and company did not really work such as 100 percent cash margins. Meanwhile, the regulatory duties on non-essential imports could not dent the imports growth. While the export package announced by Nawaz in January may have resulted in inching up exports, that is peanuts relative to imports growth.
Exports grew by 21 percent or $314 million in July while the imports are up by a whopping 51 percent or $1.531 million to worsen the trade deficit by 78 percent or $1,269 million. The focus should be on reviving textile exports to generate employment and foreign exchange earnings; but the core of the issue is high imports growth that has to be curtailed on emergency footings.
Thus, the domestic demand has to be managed. SBP should tighten the monetary policy and should also let the exchange rate to slip a bit. Apart from that, petroleum products prices should be revised up to discourage consumption. The trend may be inflationary in nature and would curb the growth momentum a bit. But beggars can’t be choosers.
There is no point saying that SBP reserves are still covering over 3 months of reserves and no immediate crisis is in offing. That is an ostrich approach and is no good for the economy. Immediate actions are warranted to avert crisis.
Apart from tightening policies, the need is to go to the global capital market urgently to raise debt. The country cannot afford to lose $1.5 billion of reserves every month, at this pace, by Dec; the SBP reserves would be less than 2 months of import cover. It’s time to go to friendly countries, including China, for borrowing. And at the same time steps are required to promote exports.
Tough days are ahead. US bashing on Pakistan is crystal clear. Forget about any CSF money or other form of support from the US.There is not much juice in remittances to grow at the pace they used to a couple of years back. Promoting foreign investment is key. The new PM should divert from the policies of Dar and must gather his acts quickly before it’s too late.