Contrary to deteriorating trends in most of the economic indicators, external sector of the country has shown a substantial improvement in the current fiscal year. According to the latest data released by the State Bank, current account balance of the country posted a surplus of $205 million in July-May, 2011 in sharp contrast to a massive deficit of $3.4 billion registered in the corresponding period of last year.
Such a turn for the better was largely attributable to a record inflow of home remittances and higher exports during the current year. Aggregate deficit of $13.96 billion incurred on trade, services and income accounts was more than compensated by a huge inflow of $14.26 billion on account of current account transfers, comprising largely remittances sent by overseas Pakistanis. With the overall level of $32.17 billion of imports and $22.78 billion of exports, country's trade deficit shrank to $9.39 billion as compared to $10.21 billion in the same period last year.
Services sector and income sector deficits were estimated at $1.73 billion and $2.84 billion, respectively. However, while the overall trend during the current year has been found to be quite satisfactory, current account data of the latest month was not very much encouraging because of a deficit of $457 million in May, 2011 as compared with a surplus of $630 million in the previous month. It can, nonetheless, be safely stated that Pakistan's overall performance in the external sector during FY11 would certainly be much better than the annual plan's original target of current account deficit of 3.4 percent of GDP.
There is probably no need to emphasise that a positive turnaround in the current account balance of the country is a very welcome development. With a solid improvement in the current account, the country, unlike in most of the years in the past, would not be forced to borrow from outside sources and add to its foreign exchange liabilities. Also, such a healthy development will obviate the risk of default in the near future, stabilise exchange rate of PKR, and help maintain foreign exchange reserves at a comfortable level. It is also apparent that uninterrupted flow of imports facilitated by a favourable outcome in the external sector could go a long way in reviving economy and generating employment opportunities in the country.
Besides, the country would now be under less compulsion to negotiate another programme with the IMF though its seal of approval would still be needed to keep the foreign investors and donors, especially multilateral financial institutions such as the World Bank and the Asian Development Bank, reasonably satisfied about the soundness of government's economic policies and country's economic prospects. In any case, it would in the country's own interest to continue following a reform agenda in consultation with the IMF because Pakistan is required to pay certain short-term liabilities in the near future and the improvement in the current account balance is not yet well entrenched. In fact, most of the analysts believe that some of the transitory factors have contributed to recent current account improvement.
For instance, exports have risen due to an unusual increase in the international prices of our export goods, particularly those of cotton and its products, due to global shortage of cotton. Since the world cotton production is expected to be normal in the coming year (prices are already falling), Pakistan may not be able to sustain previous year's level of receipts from this source. Similarly, home remittances might have jumped due to unrest in North Africa and the Middle East or certain apprehensions in the developed countries and such factors cannot be relied upon to boost the prospects of external sector for an indefinite period.
On the other hand, foreign investment has declined sharply in the recent past, hurting the growth prospects of the economy and undermining the prospects of improvement in the external sector on a sustainable basis. International oil prices in the coming months are also uncertain due to a variety of factors. All of this calls for adopting a consistent and cautious approach towards the situation with a view to undertaking appropriate policy measures, if and when needed, to sustain the current improvement in the external sector.