Pakistan’s current account deficit (CAD) reduced to 1.2% of GDP in FY23 and it is expected to remain at a similar level in FY24.

This reduced size of deficit might still not be sustainable. For the sustainability of these results, a careful evaluation is necessary. From a high level perspective, we understand that there is a relationship between the current account deficit and net national savings (saving minus investments) in an economy.

Net national savings is the sum of the net savings of the government (including provincial governments) and net savings of all entities other than the government (including public sector enterprises).

The shortfall/excess in these savings is the primary reason for the current account balance i.e. if net national saving is negative, there will be a current account deficit and vice versa. This relationship ties up matters related to external accounts with more internal and controllable matters.

Pakistan’s current account posts significant surplus of $397mn in December

The CAD could be kept under control if the net savings of the government as well as net savings of non – government sections of the economy could be improved.

Policies therefore need to address each of the component parts of the equation:

Net savings of the Government = Revenues – current expenditure – development expenditure

Net savings of the non-Government = Revenues – Expenditures – Investments

Interestingly, shifting money from the pocket of government to non-government and vice versa is of no benefit at net national savings level, as outflow for one is inflow for the other and they cancel out at the national level.

According to this principle, tax levied by the government to the publicalready in the tax net is of no benefit at the national level. However, levying tax on those who are not in the tax net brings in new money into the system, as there is no outflow from documented section while there is inflow for the government and overall pie of net national savings increase.

Tight monetary policy reduces current account deficit

Similarly high current and development expenditure of the government does not increase or reduce net savings at national level if the expense of the government is income of non-government. However, it is a net loss when the documented outflow of money from the government goes into the pockets of non-documented non-government section, for example, subsidies to non-taxed farmers and others.

On the same basis, lack of governance is a serious problem, as any expense which is not an income of the documented section is a loss at national level.

Reducing consumption by inducing to save and deferring expenses amid high interest rates improves saving of the non-government section but high cost reduces savings of the government as well.

Besides this, the saving of non-government section goes back into the hands of the government through investment in government securities.

Accordingly, these do not have any effect at the national level. Investment in government securities from the non-documented sector will, however, bring new money into the system.

Pakistan’s current account posts surplus of $9mn in November

The policy of higher taxes on savings is also inappropriate. Specifically, the policy of higher taxes on savings of non-filer is counterproductive.

Although savings of both the filers and non-filers are important, the savings of non-filers, which were not in the documented section, increases the overall net savings at the national level. Therefore, overall savings need to be incentivised.

Similar problems exist with the public sector (categorized under the non-government section). For example, when a public sector energy company does not receive its dues invoiced to non-documented section of the economy, it results in reduction in net saving at national level.

In FY23, the consumption and investment decisions were deferred by the non-government section of the economy, due to very high interest cost. This along with a reduction in government expenditure on development has contributed to the reduction in the current account deficit.

However, the consumption and investment decisions are only deferred in high interest rate environment, and these will be resumed. For a more sustainable fix, policies should address the following:

• a. Improve net saving of the government, either by: i. Increasing revenues from non-documented section of the economy; ii.Reducing expenses, including subsidies, targeted towards the non-document section.

• b. Improve net savings of non-government by incentivizing savings of both filers and non-filers

• c. Improve net national savings by improving governance

The fast-growing population of the country needs an enabling environment for business and employment on a sustainable basis, but using high interest rates as a tool has its limitations. Therefore, fixing is required to augment the existing polices.

The polices that shift saving from government to non-government are not beneficial at the national level.

However, it is the undocumented side of the economy whose inflows into the government revenue and outflows from the government revenue either increases or reduces the overall size net national savings which in turn determines the CAD.

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