Marked decline in C/A deficit

It is indeed satisfying for the government to see that current account (C/A) deficit of the country has narrowed remarkably during the current fiscal year. According to the latest data released by the State Bank on 18th October, 2019, the C/A deficit of Pakistan in the first quarter of FY20 has plunged to dollar 1.55 billion from dollar 4.29 billion in the same period of last year, showing a fall of dollar 2.74 billion or 64 percent. Such a sharp decline was mainly on the back of a 21 percent reduction in the import bill of the country. Cumulative deficit of goods, services and income sectors decreased by dollar 3.25 billion to dollar 6.20 billion as compared with the deficit of dollar 9.46 billion in July-September, 2018. Goods' exports rose by 2.37 percent to dollar 6.03 billion, whereas imports shrank by a much wider margin of 23 percent to dollar 11.03 billion. As a consequence, balance of trade in goods dropped by 40 percent to dollar 5.0 billion in July-September, 2019 as against dollar 8.38 billion in the comparable period of last year. However, services and income sector deficits continued to widen. With dollar 1.23 billion of exports and dollar 2.43 billion of imports, services' sector deficit went up by 12.0 percent to dollar 1.20 billion while income sector deficit rose to dollar 1.48 billion in the first quarter of the current fiscal as against dollar 1.12 billion in the corresponding quarter of a year earlier. The country's external sector position month-on-month basis was also quite encouraging as the C/A deficit during September, 2019 also shrank by 57 percent to dollar 259 million compared to dollar 610 million in August, 2019. There is however a need to monitor the reduction in import of industrial raw material as it would hurt local production, impede the much required increase in exports and may result in shortages contributing towards fuelling inflation. It is therefore necessary that should such a scenario appear to be emerging, steps be taken to protect import of industrial raw material.

There is of course hardly any need to say that a massive contraction of 64 percent in C/A defect is a positive development, especially at a time when most of the other macroeconomic indicators like inflation, budgetary position, unemployment, poverty and the level of outstanding public debt are still deteriorating and the government is being blamed for the negative trend in these variables by some analysts and all the opposition parties. Although the government has not said so, the level of improvement in the external sector seems to have exceeded the government expectations under the best of scenarios. Anyway, if the present trend continues, the C/A deficit of the country could be in the range of dollar 6 to 7 billion for 2019-20 which would be a massive improvement compared to the deficits of dollar 13.83 billion in FY19 and a historic high of dollar 19.90 billion in FY18. Such a dramatic improvement in the foreign sector accounts of the country would reduce the need of borrowings from outside sources, check the depletion of foreign exchange reserves of the country and help stabilise the exchange rate of the rupee. Seen from the recent developments in these areas, early signs of these gains are already visible. Besides, the continuation of this trend would hopefully encourage foreign investors as they would feel more comfortable about the solvency of the country and the flow of capital and raw material imports would remain uninterrupted to sustain industrial activity and contain price pressures on the economy. However, while appreciating the improvement in the foreign sector, certain weak areas also need to be highlighted and analysed with a view to wiping out the deficit in the external sector and reducing the outstanding stock of debt which is at a very high level. Debt servicing, which was dollar 7.50 billion in FY18 and jumped to dollar 11.59 billion in FY19, is already devouring a major chunk of foreign exchange resources and there is a dire need to reduce it to the minimum level to have a sustainable position in the external sector. Another worrying aspect is that foreign investment in the country has dwindled to insignificant levels and the country cannot increase its productivity to a satisfactory level in its absence due to very low saving rate in the domestic economy. There are concerns about stagnation in exports; however, one must remember that it takes time to increase exports and these seem to be presently sluggish because of depressed prices of our exportable products in the international market.

The situation had, therefore, required the government to seek financial assistance from friendly countries and negotiate an EFF programme with the IMF. Higher inflation rate due to massive depreciation of rupee has also constrained the SBP to increase the policy rate to 13.25 percent and all of this has angered the business community and evoked criticism from almost all sections of society. We can only hope that the government would remain engaged with all stakeholders on an ongoing basis to facilitate economic activity in the present difficult and trying environment.