CSF and the BoP

There are some concerns that the US might be suspending the CSF payments to Pakistan – those handsome, enormous paychecks that shine on our current account. Pakistan’s failure to crack down on the Haqqani network thus might cost it an annual billion-plus dollars. But what precisely is the impact of the CSF?
To the uninitiated, the CSF (Coalition Support Fund) is a reimbursement of the expenditures Pakistan incurs in support of US operation in Afghanistan. It thus falls under the category of a service export. And sadly, it is the only real service export we have; in a previous article, (see “A disservice to services,” published June 29, 2015), BR Research highlighted the abysmal state of Pakistan’s external service sector and how CSF is the only service export (other than IT) to maintain a positive balance.
Some numbers should put the weight of the CSF into perspective: in FY15, Pakistan received around $1.5 billion in CSF payments. This was over 25 percent of total service exports that year, and amounted to nearly 5 percent of the country’s total exports (both goods and services combined). Moreover, Pakistan’s defense budget for FY15 was Rs700 billion. The CSF inflows that year were thus equivalent to over 20 percent of the country’s entire defense budget!
The impact that this item has on our current account should not be taken for granted. The first month of the new fiscal year has seen the current account deficit contract by 80 percent year-on-year to $159 million – quite a positive development indeed. But there isn’t much reason to rejoice, because it was due largely to the $337 million CSF tranche released that month; remittances were lower both on a month-on-month and year-on-year basis, and softer commodity prices did lower the import bill but also took a toll on exports.
If the CSF is discontinued, expect the country’s service exports to fall to the $4 billion mark. Moreover, you can also expect the current account deficit to widen by nearly 50 percent, as the CSF amounted to almost half the current account deficit as of FY15 (and incidentally FY14 as well).
What the country needs to do is rejuvenate stagnated exports – particularly in textile sector – to bring it back on a growth trajectory and mitigate the impact that the discontinuation of CSF will have on the country’s balance sheet. Pakistan has already received over $13 billion in CSF payments since the program began in 2001, and it’s understood that we can’t keep cashing these checks forever.