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EDITORIAL: July-January 2021-22 data for the current account deficit is worrying as it has crossed the 11 billion dollar mark with growth in imports continuing to outpace exports. The government rightly cites external factors for this widening trade gap including the corona-related supply chain disruptions throughout the world as well as the rise in oil prices accounting for a quarter of the country’s imports.

And, like its predecessors, also correctly points to the fact that the rise in import growth is backed by a rise in raw material and semi-finished products imports as well as capital goods imports – items which will contribute to a further rise in productivity that in turn will raise exports.

What has been ignored and continues to be ignored is that this is by now a usual cycle in this country which has prompted the country to go on its twenty-second Fund programme and while export promotion incentives (monetary and fiscal) have contributed to a narrowing of fiscal space yet they have not significantly raised exports or narrowed the trade gap.

Thus there is an urgent need to undertake empirical studies before extending these incentives and to revisit mitigating measures as they are impacting quite severely on the domestic inflation and the quality of life of the people of this country.

The International Monetary Fund’s (IMF’s) sixth review advises the State Bank of Pakistan (SBP) to use the foreign exchange rate as a shock absorber, clearly a design flaw, as it implies that a depreciating rupee may be used as a policy tool to arrest the widening trade gap by making imports more expensive and exports more attractive to foreign buyers.

However, there is by now overwhelming evidence that allowing the rupee to depreciate at a time when the real effective exchange rate is estimated at 96.7 for December by the SBP against 98.5 of November 2021 (with the January rate not yet uploaded on the website lending credence to this delay perhaps being deliberate as it may have focused economists attention on the rupee being undervalued — a condition that belies the SBP claim of a market-based rupee determination) is a highly inflationary policy for two reasons.

First, with petroleum and products accounting for more than a quarter of our imports these pass-through products are held to be mainly responsible for the ongoing general price rise. And secondly, these products also account for around a quarter of tax revenue, and to add to the woes of the general public the government pledged to the IMF that it would raise the petroleum levy per litre by 4 rupees per month till it reaches the maximum allowed of 30 rupees per litre. Ideally, one would expect the SBP to use this tool intelligently; however, given that this is a relatively new tool there may be little if any expertise to undertake econometric models of how much would represent a good balance within the SBP.

Secondly, a major component of the current account that has worked in favour of the incumbent government, a feature that was not available to such an extent to previous administrations, is the dramatic rise in remittance inflows — from a little under 20 billion dollars in 2017-18 to over 29 billion dollars last fiscal year.

The bulk of this rise is attributed to the pandemic and timely SBP policies; however, this rising trend was projected to begin its descent after the global pandemic lockdowns were over and signs of this reversal are by now evident. It is important to note that the actual remittance inflows for the first seven months of the current year were estimated at 15.8 billion dollars against 19.9 billion dollars for the entire 2017-18 — an amount that shows that the widening current account deficit should be of more concern today than what the Khan administration inherited in 2018.

One would hope that the IMF revisits its programme designs in general and the ongoing Extended Fund Facility programme in Pakistan in particular because the applicability of several components of the design to today’s global and country specific economic scenarios is clearly no longer valid. However, at the same time one would hope that our economic team — in the federal government as well as those operating in the SBP — strengthen their in-house economic expertise and within some broad policy guidelines provided by the Fund to begin to exercise good judgement.

Copyright Business Recorder, 2022


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