Pakistan's balance of payments has remained under severe pressure over the last one year with current account deficit surging to $12.4 billion (or 4.1% of GDP) in 2016-17 from almost $5 billion (1.7% of GDP) a year ago (2015-16). The country's balance of payments is likely to deteriorate further during the current fiscal year (2017-18), thus creating serious challenges for the solvency of the state.
The most worrisome is the fact that this deterioration in the balance of payments is taking place at a time when the country is having a dysfunctional government with extremely weak and frivolous economic team at the helm of affairs. Furthermore, the country is heading towards a general elections within few months' time. Doling out resources in the name of "Taraqiati Programme" (Development Programme) as well as Programme for the ruling members of the parliament-all to win the election-will be the order of the day.
Such a reckless fiscal stance would fuel aggregate demand which will not only widen fiscal deficit but would also accelerate import demand with a severe repercussion for the current account balance. But who cares, as long as I win the election?
The purpose of this article is to raise concerns for those who matter in this country. Pakistan's balance of payment started deteriorating right after the end of the IMF program in August/September 2016 which speaks volumes about the efficacy of the Program itself. I, Dr Hafiz Pasha and a few other economists knew very well that all the Reviews (sixteen in numbers) of the IMF Program were based on manipulated statistics. Furthermore, these Reviews were deliberately conducted outside Pakistan (UAE) to avoid people who were writing on the Program's outcomes. Such manipulation of statistics was in the knowledge of the IMF staff but they kept their eyes and ears closed.
As soon as the Program ended, the compulsion for manipulating statistics also waned. Furthermore, the country's former finance minister became busy with Supreme Court and JIT and gave little time to 'manage' the economy. The true health of the country's balance of payments started emerging thereafter. The current account deficit which was predicted by the IMF to be $4.7 billion for 2016-17 ended up with $12.4 billion or 4.1% of the GDP. How can the IMF staff go so wrong in forecasting a key macroeconomic variable? The answer is simple: the IMF never wanted to tell the truth. The staff of the IMF was fully in league with the former finance minister in presenting a rosy picture of the economy, thereby misguiding the people of Pakistan.
Pakistan's balance of payments has further deteriorated during the current fiscal year (2017-18). The current account deficit has widened to $7.4 billion or 4.4 percent of GDP during the first half of the fiscal year (July - December 2017) as against the full year target of $9.9 billion and $4.66 billion or 3.1 percent of GDP during the corresponding period of the last year, showing a deterioration of 59 percent. This deterioration has taken place primarily on account of an extraordinary surge in imports (18.8%). Prominent import items that exhibited extra-ordinary growth included Petroleum (26.7%), Transport (24.9%), Machinery (19%) that include telecom (43%), electrical machinery and apparatus (62%) and power generating machinery (26%). Bulk of the contribution to the increase in imports has come from Petroleum (32.3%), machinery (17.1%), agriculture and other chemicals (14.5%) and metal group (12.3%). In other words, more than three fourth (76%) of the contribution to the surge in imports has come from these four groups.
Exports on the other hand did register a reasonable growth (10.8%) after almost five years of perpetual decline. Nearly all (96%) the contribution to export growth came from four items, that is, textile (41.2%), food (25.1%), chemical and pharmaceutical products (22.2%) and petroleum groups (7.2%). It is important to note that this relatively impressive growth in exports owes heavily (93%) to the autonomous rise in international prices of these export items and only 7 percent to the increase in quantity of exports. Should we celebrate the success of much touted export policy?
Inappropriate exchange rate policy appears to have encouraged an extraordinary rise in imports. This is where the IMF staff did not do justice with the IMF Program. IMF believes in maintaining a flexible exchange rate policy, particularly, during the program period and yet they have tolerated a fixed exchange rate regime throughout the program period. Why shouldn't we criticize the IMF for eroding our external competitiveness? Furthermore, the lack of desire to curtail imports through tax and tariff policy further aggravated the external balance of payments situation.
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Balance of Payments
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(Billion $)
Items 2016-17 2017-18
(Forecast)
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Export of Goods 21.9 23.5-24.5
Import of Goods -48.5 -57.0-58.0
Trade Balance (A) -26.6 - 33.5
Service Balance (B) -4.3 -4.5
Income Balance (C) -5.0 -4.9
Goods, Service and Income Balance (A+B+C) -35.9 -42.9
Current Transfers (Net) (D) 23.5 24.9
Current Account Deficit (A + B +C - D) = E -12.4 -18.0
External Debt Servicing (F) 8.2 8.5
Total Financing Requirement (E+F) 20.6 26.5
Likely External Inflows (E) 10.4 14.0-14.5
Financing Gap (E+F - G) 10.2 12.0-12.5
External Debt and Liabilities 83.0 95.0-96.0
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