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The month of June 2021 has seen a big deterioration in the current account (V/A) of the balance of payments (BoP). A deficit of $1.6 billion has been recorded in only one month. This has converted the current account which was in surplus up to April 2021 into an annual deficit of $1.8 billion by the end of the year.

The deficit is still low by historical standards. It was $4.4 billion in 2019-20. Also, there is a large balance of payments surplus of $5.6 billion in 2020-21 and foreign exchange reserves have risen to a peak level of $17.3 billion.

Therefore, there is probably reason still to believe that stabilization has been achieved in the balance of payments and the incumbent government has adopted the right posture of pushing for higher growth. The question is whether there is any emerging cause for concern?

The answer lies in the path of imports during 2020-21. The beginning of the year saw the continued impact both domestically and globally of Covid-19. International commodity prices were very depressed. The price of crude oil was down to $ 40 per barrel. Similarly, the prices of other items were down by 20 percent to 50 percent in relation to pre-Covid-19 levels.

The pandemic induced recession and low international prices brought down the monthly import bill in July 2020 to $3.6 billion, 16 percent below the level of July 2019. Thereafter, as the economy started to recover, imports started showing growth from the second quarter of 2020-21 onwards. It was 5 percent in the second quarter, 30 percent in the third quarter and an unbelievable 71 percent in the fourth quarter of 2020-21.

The month of June 2021 has seen the highest level of imports ever in one month of $6.3 billion. The last historical peak was in May 2018 of $5.1 billion. The jump in relation to June 2020 is 78 percent and in relation to May 2021 it is 27 percent.

There is need to diagnose the reasons for the unprecedented jump in imports in recent months. The increase is across the board. The last quarter of 2020-21 has seen a 52 percent jump in food imports, 39 percent in machinery, 278 percent in transport equipment, 150 percent in petroleum and so on.

The temptation is to conclude that the increase is largely due to the rise in volumes as the economy recovered. What is perhaps not appreciated is that almost half the increase is due to big jumps in commodity prices due to the process of recovery in the world economy. Over the year, prices of key imports have risen from14 percent to 150 percent. For example, the price of crude oil is up 150 percent in June as compared to the level in June 2020. Other high inflation items are palm oil, cotton, iron and steel products and medicines with increases of 88, 37, 31 and 84 percent, respectively. We are seeing in imports a ‘double whammy’, of both rising volumes and rising prices.

Therefore, the level of goods import at $6.3 billion in June 2021 has rung some initial warning bells. If the high prices persist and the economy continues to grow at over 4 percent, are we going to see imports rising to between $60 to $65 billion in 2021-22? Exports could optimistically increase to $27 billion during the year. If so, are we looking at a trade deficit of $33 to 38 billion, almost 18 to 36 percent above the level in 2020-21 of just over $28 billion?

This scenario is somewhat scary and implies that the economy may be back to a high current account deficit of well above $ 7 billion and approaching the double-digit level. Will it be necessary once again to abandon the pursuit of higher growth and revert to a policy of stabilization of the balance of payments? Alternatively, will the larger current account deficit be comfortably financed by the currently high level of foreign exchange reserves or by larger inflows into the financial account? The Government needs to look at its projections once again. The Annual Plan has projected that the current account deficit will be only $ 2billion or so.

The problem is magnified by the fact that relations with the IMF are strained at this time. The IMF Extended Fund Facility is in a state of suspension and the sixth review is due in September 2021.

The IMF balance of payments projections after the completion of the second to fifth reviews in early 2021 were optimistic. Imports were projected at $46 billion in 2020-21. They have been $7 billion higher. Fortunately, home remittances, exports of goods and services were significantly larger, and the year has closed with a smaller current account deficit of $1.8 billion, as compared to the estimate of $4.1 billion by the IMF.

The IMF projection for 2021-22 is of imports at $50 billion. Imports have already exceeded $53 billion in 2020-21 and, as highlighted above, could be substantially higher in 2021-22. Fortunately, exports and remittances combined could also be larger by $6 billion or so in 2021-22 than the IMF projections. Nevertheless, the IMF estimate of the current account deficit of $5.4 billion in 2021-22 could be significantly on the conservative side.

The current posture of the IMF in its reform programme is, more or less, exclusively on improvement of the budgetary situation. There is the likelihood that the emphasis of the IMF may shift back to the management of the balance of payments. Will the government be willing to go back to a replication once again of measures like high currency depreciation and interest rate hike? This will jeopardize the present strategy of higher growth and lower inflation.

The problem is that if imports remain high at close to levels in the last quarter of 2020-21 then with a resulting larger current account deficit there will now be even greater need for IMF support and continuation of the EFF. Some of the reforms agreed to but not implemented yet may now have to be focused on a priority basis, including hike in electricity tariffs, jump in the petroleum levy, autonomy of SBP and so on.

The economy could be back to the stop-go cycle. We hope and pray that the mushroom growth in imports and the hike in international commodity prices are temporary phenomena. The people can ill-afford another round of belt tightening with slower growth in jobs and higher inflation in food and other prices at this time.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2021

Dr Hafiz A Pasha

The writer is Professor Emeritus at BNU and former Federal Minister


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