After narrowing of trade deficit, a modest rise in home remittances and doubling of aggregate foreign investment, it was expected that current account deficit of the country would worsen during FY13. According to the data released by the State Bank on 18th July, 2013, current account balance of the country posted a deficit of dollar 2.30 billion during 2012-13 compared to dollar 4.66 billion in the previous year, depicting a sharp decline of dollar 2.36 billion or 51 percent. Component-wise, overall deficit of trade, services and income sectors declined by 10 percent or dollar 2.28 billion to dollar 19.91 billion against the deficit of dollar 22.2 billion in the preceding year. With imports at dollar 39.8 billion and exports at dollar 24.7 billion, trade deficit stood at dollar 15 billion compared to dollar 15.76 billion in FY12. Month-on-month basis, current account registered a deficit of dollar 163 million in June, 2013, which was some 70 percent or dollar 367 million lower than the previous month.
A substantial decline in the current account deficit of the country during FY13 is indeed a very welcome development, especially at a time when the country was facing almost a crisis situation in the external sector. There is hardly any need to say that an improved position in the external sector had reduced the need to borrow from outside sources, and helped to arrest the deteriorating trend in foreign exchange reserves of the country and exchange rate of rupee to an extent during FY13. Besides, price pressures in economy would have been more pronounced without an improvement in the current account deficit. Such a healthy development had also a positive impact on monetary policy formulation in the country and the State Bank would now be less inclined to raise the policy rate by a big margin because, after a positive outcome in the external sector, there will be less pressure on the SBP to keep the country's interest rate structure favourable for balance of payments purposes. However, while analysing the current account outcome during FY13, it could be easily concluded that the decline in deficit was basically attributable to the receipt of Coalition Support Fund (CSF). Pakistan received two instalments of CSF worth dollar 1.8 billion during the last fiscal year. Without this inflow, the deficit in the current account would have been closer to the previous level.
The sustainability of the trend witnessed during FY13 could also be questioned for other reasons. The level of imports during the year was low because the economy wasn't doing well. As soon as the economy picks up, the level of imports would increase and widen the gap in the merchandise account. The recent government efforts to reduce the circular debt problem and increase the supply of electricity would raise the demand for POL products. There was also some uncertainty over the pace of workers' remittances. All these factors reinforce the view that Pakistan needs to enhance the level of exports by increasing the productivity of economy and through product and market diversification for a sustainable position in the external sector. This would, however, not be an easy task in presence of an acute shortage of energy and profoundly bad law and order situation. Nevertheless, we feel that successful negotiations with the IMF for a fresh programme could afford the policymakers an opportunity to take stock of the situation and design appropriate policies to ensure that a reasonable balance in the current account is achieved in a short period of time. Last but not least, there exists no threat of insolvency particularly after fresh IMF arrangement. The country has the capacity to meet its debt obligations because the threat of insolvency is no longer real.