Pakistan's current account deficit has widened by $12 billion (3.3 percent of the GDP) in the last two years largely because the exports remained a low priority during the last five years.
According to the State Bank of Pakistan (SBP) brief presented to the National Assembly's Standing Committee on Finance Wednesday on 'Past Trends and Recent Development of Current Account Balance,' Pakistan's current account balance was 1.1 percent of the GDP when the present government took the office in 2013 and is projected to increase to 5 percent (projected) by the close of current fiscal year, posting an increase of 3.7 percent of the GDP during the last five years with a phenomenal increase during the last two years of the present government.
There was a complete lack of growth in exports during the tenure of present government and by the end of current fiscal year, the country's exports will be around $24 billion, the figure the present government had inherited in 2013. On the other hand, imports will be touching $54 billion mark in fiscal year 2018 against $40 billion in 2013.
The SBP has projected current account deficit at $16.221 billion for the current fiscal year as compared to $2.496 billion in fiscal year 2013, with $12 billion increase alone during the last two years of the present government's tenure.
After remaining at $3.1 billion (1.3 percent of GDP) in fiscal year 2014 and $2.8 billion (1.0 percent of GDP) in fiscal year 2015, the current account deficit widened to US $4.9 billion (1.7 percent of GDP) in fiscal year 2016, and reached as high as $12.4 billion (4.1 percent of GDP) during the fiscal year 2017.
The SBP stated that increase in current account deficit is largely attributed to a surge in productive imports (mainly the machinery, transport, metal and petroleum products). Meanwhile, a modest decline in exports, a small reduction in remittances and lower CSF inflows contained foreign exchange inflows into the country. It added that exports performance largely depends upon favorable international prices, degree of global demand, and domestic factors like export competitiveness.
The slowdown in global economy in the recent past, particularly the subdued conditions in international trade, has impacted the exports from emerging economies, and Pakistan was not an exception.
The remittances, a major offsetting factor of higher trade deficit, could not maintain their growth momentum due to: (a) challenging economic situation in Gulf countries; (b) increasing regulatory requirements for international fund transfers, especially in case of the US; and (c) heightened uncertainty on account of Brexit vote.
The widening of current account deficit in fiscal year 2017 has accompanied with a decade high level of real GDP growth. Specifically, real GDP grew by 5.3 percent in fiscal year 2017, as compared to 4.5 in fiscal year 2016. The pickup in economic activity along with investments in CPEC projects, have created demand for machinery, transport, metal, petroleum products and other productive imports.
The members of the committee, however, contested the government claim and stated that current account deficit has no relevance with the GDP growth.
The SBP stated that latest data shows that Pakistan's external current account balance continued to widen and posted a deficit of $9.2 billion during July-January 2017-18 compared to a deficit of $6.2 in the same period of 2016-17. This 48.1 percent increase in current account deficit in fiscal year 2017-18 is largely attributed to higher trade deficit due to a double-digit rise in imports as well as absence of CSF inflows and sluggish growth in workers' remittances.
The SBP added the current improvement in international commodity prices such as of rice and cotton is expected to have a positive impact on Pakistan exports in coming months. Similarly, improving global demand is going to have a favorable impact on high value added exports of Pakistan.
About the steps taken to reduce the current account deficit, the SBP added that cognizant of the recent widening of current account deficit, a number of steps were taken to contain the trade deficit and these steps are likely to improve external current account position without compromising on the import of productive products.
In a bid to support the flow of remittances to the country, the SBP has also announced various measures in December fiscal year 2017. These include: (i) launching of Asaan Remittance Account. The objective of this initiative is to encourage home remittances through proper accounts instead of traditional cash over tile counter transactions. (ii) To support the flow of remittance into Pakistan, the GOP in collaboration with SBP has launched the promotion of Home Remittance through M-wallet Account. M-Wallet accounts will facilitate the transfer of remittance through swift, convenient and cost-effective way.
Recently, rupee after sustaining its level for last two years, depreciated around 5 percent against the US dollar in December 2017. Going forward this step is expected to reduce trade deficit by encouraging exports and costlier imports. In addition to that, the lower kerb premium after the depreciation would encourage workers to send foreign exchange through official channels.
The SBP said that it has recently increased the policy rate by 25 basis points, which would slow down the demand pressures as well as imports in the country to help reduce current account deficit.