It’s a vicious cycle; the economy of Pakistan faces balance of payment crises that forces it to seek financial assistance from the IMF every few years. It leads to macroeconomic instability in the country, which is often compounded by other exogenous shocks such as supply-side issues in agricultural commodities, volatile oil prices and shocks to global trade and investments. A major reason for approaching the IMF after every few years is the paucity of foreign exchange reserves held by the State Bank of Pakistan. The crisis exacerbates when the foreign exchange reserves are unable to cover more than a couple of months of import payments. Therefore, reducing the external pressures on the current account balance can help build the foreign reserves, particularly when capital inflows are limited.

When the PTI government came to power, one of its major objectives was to reduce the current account deficit it inherited from the previous government, accumulate enough reserves to mitigate the balance of payment crisis and avoid approaching the IMF. Although, it did eventually approach the IMF, it had applied the brakes on the declining trend in the current account deficit prior to that arrangement. The reduction in deficit required not only needed bolstering of the inflows of foreign exchange primarily through remittances and exports but also cutting down on the outflows. This reduction meant measures to discourage imports. However, a lot has already been discussed on how that has resulted in an economic slowdown.

The current account deficit was at a peak of $6 billion at the end of FY18 driven by rising import payments for transportation equipment and machinery. Corrective measures were adopted in FY19 as the government tried to stem the increasing outflow. A significant fall was witnessed in import payments for transportation equipment followed by that for machinery. The current account deficit has reduced since then, reporting a surplus in recent months.

Since 2013, Pakistan has entered into an arrangement with the IMF twice. It received the Extended Fund Facility (EFF) in September 2013 and in July 2019. The former EFF expired in September 2016. It is clearly observed that the net reserves with SBP increased between September 2013 and September 2016 and declined as soon as the facility expired. It began to increase after SBP received the funds from the latter arrangement in July 2019.

The trend in the current account balance is strongly correlated to the trend in the net reserves with SBP, particularly after March 2016 when the current account deficit started its downward trend. As the current account balance fell further into the negative territory, so did the net reserves with SBP. However, as the current account balance reversed its trend after FY18 and started increasing, so did the net reserves with SBP increase. This clearly suggests the relationship between net reserves with SBP are and the current account balance at least in the near future, particularly as the capital inflows into Pakistan are limited.

A favorable current account balance, not necessarily a surplus, can be crucial to reducing the chances of the next balance of payment crisis, unless Pakistan finds alternative sources of foreign exchange inflows through FDI and portfolio investments. However, the jury is still out on what is a suitable level for a favorable current account balance, a level that does not leak foreign exchange reserves. With the government facing inflationary pressures due to supply-side issues in essential agricultural commodities and uncertainties in global trade due to the second COVID-19 wave, striking a balance remains elusive.