EDITORIAL: The current account deficit posted a deficit of 1.8 billion dollars July-June 2020-21 (very sustainable compared to the 20 billion dollar deficit inherited by the Khan administration) in spite of record high remittance inflows of over 29.2 billion dollars (though it is unclear whether this inflow would be sustained through legal channels given that post-Covid-19 inflows from the hundi/hawala remain suspended to this day), deferred interest payment on foreign loans courtesy the G-7 countries debt relief initiative to enable developing countries deal with Covid-19 (a deferral not a write-off), and rise in total exports from 22.5 billion dollars in July-June 2020 to 25.6 billion dollars in the comparable period of 2021 (the bulk attributed to diversion of orders from badly hit Covid-19 India and Bangladesh to Pakistan last year).
The current account deficit July-May 2021 was in surplus; however, in July-June it registered a deficit. Imports become more expensive as and when the currency erodes in value. In this context, it is relevant to note that in May 2021 the rupee-dollar parity was on average around 152 and the rupee has been on a downward trajectory since, with the rate cited at 161.50 interbank (offer) on Tuesday 20 July 2021.
Imports are being cited as the main reason for the current account deficit – rising from 41 billion dollars in July-June 2020 to 52.1 billion dollars in the comparable period of 2021 – a rise of 11 billion dollars. The government cites the rise in machinery imports – from 5.9 billion dollars to 8 billion dollars (a 36 percent increase) as a major factor for the rise in imports which it argues would raise value addition, growth and provide employment opportunities but does not focus on the fact that the rise in machinery imports constitutes only 19 percent of the rise in imports in 2021. Imports of other items also increased including: (i) textile imports rose from 3.3 billion dollars in 2020 to 4.8 billion dollars (a rise of 44 percent) in 2021 while consisting of nearly 14 percent of the rise in imports last year in comparison to the year before; and raw cotton imports rose from 1.7 billion dollars in 2020 to 2.4 billion dollars in 2021 (a rise reflecting the continuation of the flawed agriculture policy of supporting sugarcane production over cotton); (ii) fuel imports from 10.5 billion dollars July-June 2020 to 11.2 billion dollars in July-June 2021; the rise is not only reflective of the rise in the international prices of oil and products but is also a major contributor to the administration’s revenue collection target through petroleum levy (PL) budgeted to generate a historic high of 610 billion rupees in the current year as well as sales tax; (iii) animal or vegetable fats from 1.8 billion dollars in 2020 to 2.6 billion dollars in 2021; (iv) plastics and articles imports rise from 2.2 billion dollars in 2020 to 3 billion dollars in 2021; and (v) vehicles, aircraft, vessels and associated transport equipment imports rose from 1.5 billion dollars in 2020 to 2.7 billion dollars in 2021.
The government argues that as growth will pick up import of machinery and raw materials (for example cotton) would rise and as more and more countries effectively tackle the Covid-19 onslaught demand and consequently price of petroleum and products would rise and therefore our import bill would also rise. However, while this reasoning no doubt focuses on the government’s capacity to attain its budgeted growth objective of 5 percent this year yet this is not the only factor that would impact on imports and by extension the current account deficit.
Undoubtedly, the rupee-dollar parity as noted above also plays a critical role in the performance of the current account and given that the rupee is declining in value despite the existing very sustainable current account deficit, the historic high remittance inflows and foreign exchange reserves with the rupee considered to be slightly undervalued in May 2021 (when the rupee-dollar parity was on average 152) any further downward movement of the currency would put added pressure on the already high debt servicing cost and fuel inflation as most of the industrial raw material, crude oil and edible oil are imported.
Copyright Business Recorder, 2021
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