Marked improvement in current account balance

In a country beset with so many problems like rising inflation, falling revenues, expanding fiscal deficit and stagnating growth prospects, it was a pleasant surprise to see that current account balance has posted a surplus of dollar 26 million during the first half of the current fiscal year in sharp contrast to a massive deficit of dollar 2.57 billion in the same period of last year.
The performance of the latest month, i.e. December, 2010 was even better and probably more significant, with the surplus amounting to dollar 601 million as against a deficit of dollar 17 million in the previous month. The turnaround was attributable to improvement in almost all the sub-sectors of the current account balance. Deficit on services' account declined by 67 percent from dollar 1.53 billion to only dollar 495 million during July-December, 2010. With the country's overall goods' imports of dollar 16.71 billion and export proceeds at dollar 11.13 billion, the trade deficit stood at dollar 5.58 billion as compared to dollar 5.86 billion in July-December, 2009.
Similarly, with dollar 1.85 billion outflows and dollar 361 million inflows, the income deficit also narrowed to dollar 1.49 billion during July-December of the current fiscal year. Higher remittances by overseas Pakistanis at dollar 5.2 billion (or 16 percent more than last year) was of course a major factor in effecting a dramatic improvement in the current account of the country.
A surplus in the current account of the country, even though a nominal one, is a very welcome development, especially when successive deficits over a prolonged period had dented our hopes for such a positive outcome. There is hardly any need to say that an improved position in the current account of the country would reduce the need to borrow from outside sources, help maintain foreign exchange reserves of the country at a comfortable level and stabilise the exchange rate of the rupee. Indirectly, the authorities of the country would now feel more confident in negotiating with the IMF and the exchange rate stability could, to a certain degree, contribute to limit the price pressures in the economy, emanating from other sources.
Besides, foreign investors would feel more comfortable about the solvency of the country, though, at this point of time, other factors seem to exercise a more negative influence on the behaviour of foreign investors. A usually forgotten impact of such a healthy development is its relationship with the monetary policy formulation in the country. The State Bank would now be less inclined to raise the policy rate by a substantial margin because, after a favourable outcome in the external sector, there will be less pressure to keep the country's interest rate structure relatively favourable for balance of payments purposes.
However, while the latest developments in the foreign sector are encouraging, there are still certain question marks on the sustainability of such a trend. The level of imports at present is low because the economy, especially the industrial sector, is performing poorly. As soon as the economy picks up, imports could witness a sharp growth and increase the gap in the merchandise account. The recent rise in the petroleum prices in the international market could also widen the trade deficit of the country in the coming months. Also, there is some uncertainty over the pace of workers' remittances. These factors reinforce the common view that long-term and sustainable improvement in the current account of the country could only be achieved by increasing the level of exports by a considerable margin through product and market diversification, with considerable gains in domestic productivity in the economy.
Of course, this would not be any easy task, especially when there is an acute shortage of gas and electricity, the law and order situation is extremely poor and the country is faced with growing militancy and intolerance. Nevertheless, we feel that the recent improvement in the current account has afforded the policymakers of the country an opportunity to take stock of the situation in a cool and calculated manner to ensure the perpetuation of the latest gains in the external sector on a lasting basis.