EDITORIAL: Pakistan’s current account surplus, the continuing focus of Prime Minister Imran Khan as a major economic achievement of his administration, registered 662 million dollar deficit in December 2020, though July-December 2020 data indicates positive 1.1 billion dollar current account surplus against negative 2 billion dollars in the comparable period of 2019. The major contributory factors include: (i) a decline in exports – from 12.3 billion dollars in July-December 2019 to 11.8 billion dollars in the comparable period 2020; (ii) an increase in imports from 22 billion dollars in July-December 2019 to 23.2 billion dollars in the comparable period of 2020; and (iii) a rise in primary income debit, mainly repatriation of income/profits, rose from 319 million dollars in November 2020 to 597 million dollars by December.
These elements accounted for the primary income deficit rising from 549 million dollars in December 2020 from 279 million dollars in November 2020 while in December 2019 the primary income deficit was 682 million dollars.
Recent criticism by government ministers, including the Prime Minister, has highlighted the need for immediate revisions in the country’s industrial policy. First and foremost, there is a need to attract foreign investment only in those sectors/subsectors where domestic capability is lacking. In other words, awarding a garbage collection contract to a foreign company which implies repatriation of considerable foreign exchange should be discouraged. And secondly; a refinance scheme must focus on capital imports particularly of plant machinery with the capacity to strengthen domestic production.
The balance on secondary income with remittances a major component indicated a positive trend with 2.78 billion dollars in December 2020 against 2.66 billion dollars in November 2020 and 2.28 billion dollars in December 2019. Remittances continued to rise in December 2020 - from 11.3 billion dollars July-December 2019 to 14 billion dollars in the comparable period of 2020.
In these columns we have consistently advocated policies that would fuel growth which, it is argued, would raise productivity and thereby new employment opportunities, raise tax collections and last but not least contain the current account deficit without the need to resort to severely contractionary monetary and fiscal policies with obvious repercussions on the growth rate. Unfortunately, from May 2019 till March 2020 when the pandemic hit the country the policies followed by the government, under the International Monetary Fund (IMF) programme, were severely contractionary, inclusive of a discount rate of 13.25 percent, a rupee that was considered undervalued to contain the historically high current account deficit and a 5.5 trillion rupee tax target considered unrealistic given the projected growth rate of just 1.5 percent.
It took the pandemic for the country’s political and economic team to focus on growth through considerable loosening of the earlier contractionary policies including: (i) the much appreciated loan deferment or restructuring facility extended by the SBP led to a total of 880.8 billion rupee worth of loans restructured or deferred with (i) corporate and commercial sector accounting for 80 percent or around 704 billion rupees, and (ii) small and medium enterprises deferred accounting for 27.5 billion rupees; the (ii) refinance scheme which allowed a rate of around 3 percent to finance wages and salaries of permanent, contractual, daily wagers as well as outsourced employees of existing as well as new borrowers of banks and DFIs for six months. This enabled many employers to keep their staff strength and weather the lockdown.
Thus the question is whether December 2020 data indicates a trend rather than a one off. The answer depends on the conditions agreed with the IMF to restart the stalled 6 billion dollar Extended Fund Facility programme. One can only hope that an agreement is reached on pro-growth policies instead of import containment that was not sustainable in any case as its negative impact on productivity and employment began to present an unassailable challenge to the government – political as well as from a long-term economic perspective.
Copyright Business Recorder, 2021
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