Growing C/A challenge

It is highly distressing that external sector position of the country continues to deteriorate. According to the latest data released by the State Bank of Pakistan, the overall current account (C/A) deficit swelled by 55 percent during the first nine months (July-March) of FY18 to reach the mark of dollar 12.029 billion as compared to dollar 7.99 billion in the corresponding period of last year. The sharp increase in the import bill was the key driver of the rising current account deficit. A detailed analysis shows that cumulative deficit of goods, services and income rose by 20 percent or dollar 4.92 billion to dollar 29.7 billion during July-March, 2018 from dollar 24.78 billion in the same period of last fiscal year. With dollar 40.596 billion of imports and dollar 18.267 billion of exports, the country's merchandise deficit mounted to dollar 22.302 billion as against dollar 18.497 billion in the corresponding period of last year. Deficit of income sector also witnessed an upward trend, reaching dollar 3.55 billion with dollar 4.108 billion of payments and dollar 558 million of receipts. Month-on-month basis, C/A posted a deficit of dollar 1.163 billion in March, 2018 as compared to dollar 1.281 billion in February, 2018. The rising C/A deficit could not be completely financed by the surplus in the financial account and forced the central bank to utilise its foreign exchange reserves which came down by dollar 4.76 billion to dollar 11.379 billion at the end of March, 2018 during this fiscal. Since the average per month import bill stood at dollar 5.346 billion during the last nine months, foreign exchange reserves held by the SBP are now little over two months' import requirement. It may also be mentioned that since home remittances and foreign direct investment are not showing significant improvements, these remain insufficient to fill the widening gap in the C/A balance.
The latest data on C/A balance is of course disturbing for a number of reasons. If the present trend continues, the overall C/A deficit could be as high as dollar 16 billion during 2017-18 or about 5 percent of the GDP. It is not difficult to understand that the continuation of this trend would lead to a further loss of foreign exchange reserves, depreciation of the exchange rate of the rupee and strengthening of inflationary expectations. If the widening C/A deficit is not arrested in time, it would also lead to shortages of imported raw materials and capital goods, adversely affecting the industrial activities, undermining the prospects of growth and causing adverse implications for investor confidence, employment and poverty levels and credit rating of the country. More worrying is the fact that enhanced productivity in the economy and increase in exports which could bring about a lasting improvement in the C/A balance are still held hostage to energy shortages, rising political tensions and policy uncertainty. The inflows from Coalition Support Fund and other assistance from the US have also been stopped with negative consequences on the balance of payments. Also worrying is the fact that home remittances from Saudi Arabia, which used to be the biggest source of foreign remittances, have tended to decline.
While most of the external sector developments continue to be negative, there are certain positive signs which could ease pressure on the C/A balance in the next few months. Realising the gravity of the situation, the government has imposed/increased levies on non-essential items of imports, introduced an amnesty scheme and depreciated the value of the rupee by about 10 percent. GSP plus status is also still in place. In our view, it would be better to further revise the tariff regime to improve merchandise account balance, review the PRI to increase home remittances, timely adjust the value of the Pak rupee to enhance competitiveness of the Pakistani products in the foreign markets and work on the diplomatic front to ensure the continuity of GSP plus status. The government may move the IMF before a crisis situation emerges in the external sector. Overall, we feel that the government has to move very fast on a number of fronts to ensure that C/A position, which continues to be under a lot of pressure, takes a turn for the better.