Kudos to the government for chopping the current account deficit (Cad) significantly in FY19! At $13.6 billion, Cad came in $6 billion lower, as import savings were $4 billion and remittance gains $2 billion. This fiscal, the economic team has more clarity on the course of action and the support to stay the course. But it’ll be challenging to further halve the FY19 Cad and meet IMF target of $6.7 billion for FY20.
While the commitments for external financing for this fiscal seem to be in place (read “External account: fully financed?” published July 12, 2019), there are risks abound. For instance, tensions along the Persian Gulf are like a tripwire for crude oil prices. It’s only the weak global demand that is keeping the oil prices in check. If that changed, Pakistan’s import cover would shrink further below (June 2019: 1.4 months).
Even if the full might of macroeconomic stabilization is revealed this fiscal – compliance with the Fund’s structural benchmarks will help in that regard – there will be a limit to how effective “import compression” measures will be this fiscal in taking another $6-7 billion bite off of the external deficit. That leaves the mantle to non-debt-creating inflows, which don’t seem well-placed either to provide a breather.
Looking at exports, they may remain susceptible to weak prices of agricultural commodities, especially cotton. Surplus crops like sugar and wheat cannot be exported without affecting local prices. Therefore, exports may stay stagnant at best, after declining by 2 percent (or $500mn) in FY19. Unless, of course, a major bilateral order (from GCC or China) provides a windfall, such as the one from Qatar for rice lately!
Expecting remittances to score yet another year of double-digit growth, however, may not be asking for too much. The FY19 remittance growth came mainly from US and UK, thanks to better economic conditions there. The Saudi and UAE remittance corridors have experienced slower growth; perhaps the slowdown in migrant stock growth can be countered by higher usage of formal channels in GCC. Turning to foreign investment, which can also help finance some of the Cad, one hopes that FY20 will do better than the last fiscal when net FDI halved to $1.7 billion. It’s difficult to attract new players in a market where existing investors have to take a sharp hit on their dollar-based returns. However, the government can still turn this account into a positive influence by scoring bilateral investments from the Gulf and by resolving existing investors’ extra-fiscal complaints.