EDITORIAL: Governor State Bank of Pakistan (SBP) Dr Reza Baqir has recently asserted that Pakistan could ride out rising external account pressures. This essentially means that this crisis too shall pass. This is not the first external account crisis the Pakistan’s economy is facing and probably not the last one. Like every previous crisis, this would also end. The worrisome fact is that the boom-bust cycle is becoming more frequent.
This potentially is the fourth crisis in twenty-odd years. Dr Baqir is right in a way that the ongoing crisis is due to higher commodity prices. One can link this to post-Covid recovery. However, by the same token, last year’s better performance in the external account was due to the first leg of the pandemic.
In the initial days, prices went down quickly, and due to smart lockdown policies at home, exports soared. Then due to severely reduced travel and global stimuli, home remittances attained a new high.
It is important to recall that the current account was in surplus for a couple of quarters before turning into red again. The deficit in recent months is at uncomfortable levels; but considering the surplus earlier, the impact is smothered. The fact of the matter is that the average monthly current account deficit in the last 24 months is similar to the one 12 months prior to it. It is the inertia of good days amid government (and SBP’s) generous stimuli that are resulting in the higher deficit lately.
Commodity prices, in the meantime, appear to be reverting to their normal level. Once that happens, the import bill in Pakistan would see a decline. Plus, the stimuli taper (including increase in the interest rates) is expected to decelerate the demand momentum too. These two factors would help in lowering the deficit.
Dr Baqir also gave the comfort to the audience that there are enough inflow buffers to finance the external imbalance. He is certainly assuming the resumption of the IMF programme.
The finance (supplementary) bill (mini-budget) and amendments to the SBP Act are awaiting the parliamentary sanction and the government is confident that the IMF Board will have the sixth review on its agenda within this month, which will not only help in getting $1 billion from the IMF but also facilitate inflows from other sources. The government could fetch better pricing on raising money from the international debt markets.
Arguably, our external account is the weakest link in our macroeconomic environment.
The question is about the sustainability of the external account. The question is how to get out of the boom and bust cycle that has unfortunately become a recurrent theme of our economy. This is what was assured by the Governor when the flexible exchange rate regime was announced. This is what was assured by the prime minister when the focus was on export-oriented industrial revival. The key is to boost exports. In the last decade, exports stagnated but remittances moved up. There is not much left to extract from remittances coming from the Middle East in particular.
Traditional exporting sectors such as textiles have a lot of potential but the industry asks for too many subsidies. The real game changer could be service exports, which are an important emerging trend in the global trade. And for that the need is to help our ICT graduates generate exportable work hours. The government needs to focus on both traditional and services exports to grow. That can allow the economy to grow beyond 4 percent on a sustainable basis.
The equation is simple. Exports are down from 12 percent in early 2000s to 9 percent by now. While the imports at 19 percent of GDP last year exceed the past 20 years’ average of 18 percent. The problem of Pakistan is not higher imports; the fault lies in falling exports. That is why the balance of constrained growth (as computed by the Asian Development Bank) has declined from 5 percent to 3.8 percent.
Copyright Business Recorder, 2022