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EDITORIAL: The government has succeeded in containing the current account deficit to 1.2 billion dollars in July compared to 2.2 billion dollars in June. This achievement is sadly not on the back of any out of the box long-term policy measures but on short-term measures that have been followed by previous administrations including the PTI (Pakistan Tehreek-e-Insaf) administration, in 2018 after it inherited a historically high unsustainable current account deficit of nearly 20 billion dollars.

The short-term measures include (i) a high discount rate (on 7 July the rate was raised by 125 basis points to 15 percent) which squeezes productivity, thereby reducing imports of raw materials and semi-finished products; (ii) a weakening of the rupee vis-a-vis the dollar (205.82 rupees to the dollar on the last day of June 2022 which then began to weaken peaking on 30 July at 239.71) — a policy designed to make imports unattractive; and (iii) the government decided to ban the import of specified luxury items, a policy against the guiding principles of WTO (World Trade Organisation); however, initially there were reports that the government allowed release of items that had already been booked by importers; be that as it may, the policy was reversed with the much more economically viable policy of raising the customs duties on these luxury items; and (iv) the ongoing Russia-Ukraine war’s devastating impact on raising the price of fuel (which abated in July) and subsequently a declining demand for commodities (Pakistan’s major export items) reduced imports in July but also exports.

Trade deficit was 3.3 billion dollars in July against 4.6 billion dollars in June; however, it should be a source of concern that the trade deficit was negative 516,370 million in rupees in July 2021 against negative 601,010 million rupees in July 2022.

The fundamentals therefore remain weak and the July 2021 current account deficit was lower at 851 million dollars indicative of the possibility of the cycle coming full circle again whereby the current account deficit would again rise necessitating the implementation of these very same contractionary policies which negatively impact on growth as well as on employment opportunities.

And if one adds the element of the contractionary fiscal and monetary policies agreed by the Acting Governor State Bank of Pakistan and Minister of Finance with the International Monetary Fund (IMF) under the ongoing Extended Fund Facility programme the country is faced with the prospect of a contained current account deficit but high unemployment due to a contracting economy.

Growth is to be achieved through borrowings — domestically and externally — which would further constrain fiscal space as the cost of debt servicing will rise exponentially. And to add to the woes of the government, the devastation caused by floods and the need to extend assistance to those made homeless in large parts of the country would further limit fiscal space.

It is no doubt a very tough situation to have to deal with for any economic team; however, one would have hoped that the incumbent government had taken some additional out of the box measures to deal with the crisis.

One obvious measure that Business Recorder has been proposing to little avail is a curtailment of current expenditure and implementation of structural reforms in the energy and tax sectors of the economy — measures that would decrease the need for state resources by at least a trillion rupees which can then be diverted to the flood affected people. This must be accompanied by pension reforms and minimising borrowing from external sources, however concessional, to meeting the immediate needs of the economy and not for budget support. Without these reforms the cycle from unsustainable to sustainable current account deficit will continue that would propel the government (present and future) to seek IMF assistance again and again.

Copyright Business Recorder, 2022


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