EDITORIAL: The PTI administration’s focus for the first-year in its five-year tenure was to bring down the current account deficit that it inherited of 20 billion dollars – a situation that subsequently led to relying heavily on three friendly countries to procure more than 12 billion dollar loans to meet debt obligations, massively reduce the import bill through rupee depreciation and a high discount rate, raise exports to contain the trade deficit and encourage remittance inflows to meet the shortfall in foreign exchange reserves rather than through incurring more debt. Today, the current account is in surplus and is constantly cited as a yardstick of the government’s success in dealing with the crisis.
Economists, however, advise caution on three counts. First and foremost, while exports have increased by 13.5 percent July-March 2021 compared to the comparable period of 2020 yet this rise is in not attributable to: (i) rupee depreciation (a usual policy adopted by countries to make their exports attractive decried as unfair by competitors) as Pakistani exports have not significantly increased as and when the rupee has depreciated to the point of being under-valued; and (ii) our major export items, the recipients of zero rating incentives, including food group (exports declined from 3475 million dollars July-March 2020 to 3297 million dollars in 2021), a small rise in exports of textiles attributed to diversion of export orders from India and Bangladesh to Pakistan due to Covid-19 (from 10211 million dollars in 2020 to 10423 million in 2021) or other major export items including carpets, surgical and sports good and leather (from 2810 million dollars in July-March 2020 to 2764 million dollars in 2021). Instead the rise is attributed to all others which rose from 1062 million dollars last year to 1440 million dollars in the current year which one would assume includes a rise in IT exports.
Second, imports declined massively however unfortunately their decline is not sourced to any meaningful import substitution policies for example (i) setting up edible oil manufacturing plants (palm oil imports rose from 1314 million dollars July-March 2020 to 1730 million dollars in the comparable period of 2021), (ii) completely knock down units used in assembly of vehicles with no indigenization of the production process accounted for a massive rise in imports – from 602 million dollars in July-March 2020 to 1017 million dollars in the current year (partly attributable to no indigenization requirement for new plants) and (iii) a rise in raw cotton imports (from 972 million dollars last year July-March 2020 to 1407 million dollars in the current year reflecting the need for an appropriate farm policy). Business Recorder supports a focus on import substitution policies that are well defined and structured to ensure that dependence on items that can be produced domestically ends in a sustainable manner.
Finally, the major contributor to a current account surplus in recent months has been remittance inflows which have reached unprecedentedly high levels. While the government claims this rise is due to support by non-resident Pakistanis for Imran Khan’s government, yet there are some other factors that are contributing to this rise including: (i) cessation of travel due to Covid-19 which accounted for cessation of the hundi/hawala system. One would hope that the State Bank of Pakistan (SBP) remains focused on ensuring that once travel is restored the bulk of remittance inflows continue through the formal sector; (ii) high domestic inflation, especially food inflation, no doubt raised the need for higher inflows to cater to the needs of families back home; and (iii) extremely low rates of return in foreign countries which may account for inflows into Roshan Digital Account and other accounts however once interest rates become positive in the West there would be stiffer competition to such inflows.
It is important to note that the gains made in the current account surplus are not sustainable and one would hope that the government looks towards changing the country’s productive base to ensure higher value-added exports, import substitution and last but not least fiscal and monetary policies that are appropriate and likely to achieve these objectives.
Copyright Business Recorder, 2021
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