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The current account is in surplus after 21 quarters of deficits. When the incumbents came to power, the first quarter (1QFY19) deficit was $4.1 billion (1.5 percent of GDP). The quarter prior to that had a deficit of $6.1 billion. The rate of monthly deficit hovered between $1.5-2 billion. This was eating reserves fast. There was no other option for the government but to significantly curtail the deficit. The results started yielding in FY20 and FY21, with a quarterly surplus of $792 million (0.3 percent of GDP).

Some argue that current account surplus is not something to blow the trumpet over. Others believe that this improvement is due to currency depreciation and higher interest rates, and has left the federal government with little to write home about. Both are partially right. Still, others believe that current account improvement is due to loan repayment deferment – and surprisingly, such questions are coming from PhD economists. For those who have any doubt, it is still not too late to learn that current account improvement is nothing to do with debt repayment. They should just remember that current account is trade balance plus remittances.

On the question whether current account surplus is good or bad; it is neither in itself. It is all relative. Economics is not hard science like physics. Unlike gravitational laws, economic laws are subjective. The situation Pakistan is going through, demanded reduction in current account deficit, before pro-growth policies. Now maybe, the time is to think growth, as the CAD has been curtailed.

“Damned if you do, damned if you don’t”, someone last year aptly commented on current account improvement. This improvement in current account did not come without cost – high inflation, low growth and unemployment/real wage decline are adverse outcomes of running tightening policies. While the PM is taking the brunt of these side effects; he should also be credited for better results. Of course, he is not an economist; but it is under his helm that a good team of economists is operating at the SBP to take the much needed and tough policy decisions.

The bottom line is that current account worries are over – for the time being. However, the improvement is not sustainable. When the economy moves towards growth, the deficit is bound to expand. The structural issues of the economy are yet to be dealt with. In terms of external account, it is primarily import curtailment and recent surprise growth in remittances, which have made this surplus possible. Exports are yet to attain momentum.

On the other side, there is no respite to government’s fiscal deficit which is the prime driver for consumption led growth. In short, without controlling fiscal deficit and boosting exports, the current account balance is bound to go in negative. On the fiscal front, the challenge is to broaden the tax base to boost tax revenues.

For manufacturing exports, the energy puzzle has to be solved. At such high energy rates, manufacturing is not viable in Pakistan. That is why despite growing demand, the exporting sectors (such as textile currently operating at full capacity), are expanding at a cautious pace. The energy circular debt problem is constantly adding off balance sheet stress on the fiscal accounts.

For circular debt reduction, the first advise by anyone is to increase the energy prices. But that would disincentivize manufacturing further. There are solutions in the form of deregulating the energy market, but that is easier said than done. In simple words, due to direct and indirect linkages, current account problem cannot be solved without fixing the energy mess.

In both fiscal and energy – there is a big element of governance challenge. Apart from FBR, the governance is mainly in the provincial domain. Here, the PTI government has to do some serious work on improving governance within Punjab. That is required to achieve any meaningful reduction in the cost of doing business or improvement in ease of doing business.

Above are challenges to keep current account deficit low without killing economic growth. There is nothing to cheer about current account surpluses by lowering the per capita income. It is the middleclass that is the driver of any economy. And that missing middle is becoming a bigger problem with focus on curtailing imports.

That leads to the question whether current account deficit is good or bad. It is good as long the world is ready to finance it – in the form of debt or investment. For example, the US is running current account deficits for the past 25 years without a break. On the other hand, China is running current account surpluses for the past twenty-five years without a break. They both are top two economies of the world.

It is the economic model that matters. And that model is dependent upon the economy size and influence these economies wield. The US is the biggest buyer of goods and services in the world while the rest of the world is the buyer of US currency. The economy can afford to run deficits. On the flip, China found its way to move up the ladder through exports – by running surpluses.

Economies like Pakistan have two options – one is to sell domestic market to world for financing its deficit through debt and investment. Other is to curtail domestic consumption and promote exports – the Chinese model. This model is being run by Bangladesh as well while India is living on current account deficit. But to live on deficit – the world has to buy your story, like India successfully sold incredible India. Investment poured in and the reserves kept on growing – despite the fact its current account remained in red.

Pakistan has to do something similar. The structure of economy will take time to solve. This is not to undermine the need of taxation and energy reforms. But the export base cannot grow without improving productivity. That cannot happen without better skillset which can only happen if social indicators are improved, which can only happen if the economy has a consistent growth in per capita income. Pakistan needs funders of current account deficit – investment and market-based debt.

This has to continue for a few years to take reserves at comfortable levels. Once achieved, one to two years of high deficit can be managed without triggering the panic button. But in Pakistan, be it 1998, 2008 or 2018, the low reserves were the major problem.

For that to be corrected, economic diplomacy is very important. A positive marketing story is imperative. Pakistan has nothing better than human resource to sell. That is yielding in terms of growing remittances. But that is not enough. ICT and other export services need to grow along with tourism flows. All these need a softer image of the country, and targeted marketing.

These things take time. Right now the focus is to build reserves, work on structural reforms and build economic narrative in the diplomatic world. The need is to move towards economic security.

In the next few months, the current account deficit will grow as imports would move up. But there has to be an inherent buffer to not let deficit balloon as the country reserves are not in a positon to leverage. That is why, flexible exchange rate and prudent monetary policy management are important. These must continue to remain independent from the influence of Islamabad.