Signs on the external sector front are ominous. According to the latest data released by the State Bank, the current account (C/A) deficit of the country is dollar 591 million in July, 2016, more than double the amount of dollar 234 million recorded in the same month of last year. A detailed analysis showed that exports of the country stood at dollar 1.506 billion as against the imports of dollar 3.094 billion, showing a trade deficit of dollar 1.588 billion during July, 2016. With an export of dollar 327 million and import of dollar 617 million, services deficit was dollar 290 million compared to only dollar 51 million in July, 2015, depicting an increase of dollar 239 million. Income sector deficit, with dollar 369 million payments and dollar 56 million receipts, also surged to dollar 313 million in July, 2016. Home remittances also fell by dollar 336 million or 20 percent compared to the same period last year.

It may be noted that current account deficit of dollar 591 million witnessed during the first month of FY17 is not an ordinary development and needs serious introspection. C/A is the broadest measure of autonomous inflows and outflows of the country, showing overall balance in trade transactions, investment flows, repatriation of profits, workers' remittances, etc, across its borders. A deficit in the C/A balance would necessitate more external borrowings required to finance this deficit or further depletion of foreign exchange reserves of the country. Higher the deficit, higher will be the need to resort to these sources of financing. If the country continues to experience such a sad situation, a stage would be reached where it would be nearly impossible to meet payment obligations, with the risk of default staring in the face and imports squeezed to an extent that industrial growth would come to a halt. Of course, the country could approach the IMF for assistance but this source is only temporary and extended with a lot of strings attached.

The more worrying aspect is that the disappointing C/A data for July, 2016 seems to be an early indicator of a gathering storm which is not likely to disappear from the horizon anytime soon. Further decline in home remittances is obvious as the projects in the Middle Eastern countries would now move slowly or abandoned altogether due to low oil prices and a cut in public sector spending. In fact, employers in some of these countries are so heartless that they have stopped paying wages to labourers for the last few months and are forcing them to leave their host country. Export earnings have been declining for the last two years and fallen by a cumulative 17 percent over this period. Foreign direct investment (FDI) is far below potential and hardly able to make a significant impact on the balance of payments. Pakistan is estimated to have saved dollar 4.5 billion per annum in oil imports due to cheap international oil prices but if, God forbid, the trend in oil prices is reversed, the outcome of this development could be serious. Another worry is that repayments of most of the commercial borrowings will be due within a year or two and besides, Pakistan has to meet payment obligations to the IMF, the Paris Club and sovereign bond investors almost at the same time. It is, however, strange that while the prospects of Pakistan's C/A balance are turning bleak, policymakers of the country are not giving enough attention to the problem. While the urgency for export expansion for a sustainable improvement in external sector is obvious, Pakistan's current policy framework is anti-manufacturing and therefore anti-exports. Withheld refunds, advance taxes, GIDC and an overvalued exchange rate are some of the examples of a negative attitude to export promotion. The government had fixed a target of dollar 35 billion exports but this is seen as highly unrealistic by trade bodies and analysts. In our view, if a bold step is not taken, especially towards the improvement in the merchandise account, C/A balance of the country could deteriorate further and foreign exchange reserves, now thought to be at a comfortable level, could fall to a dangerously low level in the not too distant future. The government needs to take a very serious note of the evolving situation and undertake appropriate policy measures before this happens.