EDITORIAL: Pakistan’s current account deficit (CAD) has fallen sharply by 47 percent during the first four months (July-October) of the current fiscal year (FY23) in comparison to the year before – in total terms 2.484 billion dollars against 5.305 billion dollars.
The major contributor to this improvement is a decline in imports that has been achieved on the back of administrative and exchange restrictions put in place by the government – restrictions that are likely to have a limited life span as they are violative of the conditions of lender agencies as well as bilaterals; additionally, given the high degree of dependency on external borrowing in the current year – to the tune of over 40 billion dollars – it is extremely doubtful if the government’s leverage to continue to place such restrictions, be they administrative or exchange, can continue.
The seventh/eighth review International Monetary Fund (IMF) documents unambiguously state that “staff emphasised that more prominence should be given to exchange rate flexibility as a means to address the balance of payment pressures rather than to administrative and exchange measures.” The rupee has weakened with respect to the dollar in recent weeks — except for an unexplained blip upwards on last Tuesday — after gaining strength initially once the eight banks identified as being responsible for raising the parity to a little over 240 reversed their earlier questionable actions.
However, from a low of about 216 rupees to a dollar, the rate has again gone up to around 223 rupees to a dollar — a rate which many believe is the equilibrium level today given the prevailing macroeconomic indicators. At this rate imports will continue to fall, barring a massive increase in the international prices of our major import items, particularly oil and products, whose prices internationally are on the rise subsequent to the OPEC + decision to curtail output by 2 million barrels a day starting 1 November; however, the recent US decision to grant immunity to the Saudi Crown Prince in the Khashoggi murder case may well lead to a revisit of this decision.
There are also concerns that exports may begin to decline if the government withdraws its electricity subsidy to exporters after the start of the ninth review talks, estimated to cost the exchequer around 100 billion rupees, designed to make their input costs regionally competitive. The IMF and Director of Middle East and Central Asia Department which includes Pakistan, Azour, stated on 13 October: “On the issue of subsidy, as in other parts of the world, subsidy that is targeted to support certain items has proved not to be very effective.
I would say it has proved to be very regressive. And in our regional economic outlook we are again looking at this issue that is showing that this is not the best way to use the very limited fiscal space that exists. Therefore, we are encouraging Pakistan as well as other countries to move from an untargeted subsidy that is a waste of resources and to dedicate those resources to those who need it.
” While ideally the government should have made a cost-benefit analysis prior to granting the export sector electricity subsidy yet it will be critical to do so now and weigh the projected rise in exports as a consequence of the subsidy against the possible delay in the ninth review that would jeopardise the rollover and additional funding pledged by the friendly countries.
What is also worrisome is the fact that remittances, a desired inflow of foreign exchange earnings that in recent years have far exceeded exports by as much as 10 billion dollars, have begun to decline and it is imperative for the State Bank of Pakistan to initiate research to determine the reasons behind their fall if the balance of payment position is to remain sustainable.
Reports indicate that the difference on offer between the hundi/hawala rupee-dollar parity and the official rate is a little over 10 rupees, a significant amount that would lure a large number of Pakistani workers abroad, especially those in the Middle East, to go the illegal route. Hence there is a need to narrow this gap and one can only hope that appropriate policy measures are taken in this regard. Therefore, notwithstanding the good news associated with the fall in the current account deficit, it is necessary to recognise the reality that there are many a slip between the cup and the lip and we would urge the economic team leaders to tread carefully and assess the pros and cons of all decisions especially those taken for political reasons that will have a major negative impact on an already beleaguered economy.
Copyright Business Recorder, 2022