Rise in C/A deficit

It is indeed a matter of concern that current account (C/A) deficit of the country continues to escalate. The latest data released by the State Bank shows that the C/A balance of the country had registered a deficit of dollar 2.577 billion during the first eleven months of the current fiscal (July - May, 2014) compared to dollar 2.157 billion in the corresponding period last year, depicting a surge of nearly 19 percent or dollar 420 million. Cumulative deficit of trade, services and income accounts was of the order of dollar 20.738 billion as against current account transfers of dollar 18.272 billion including home remittances, which had posted a growth of over 12 percent to reach a record level this year. With dollar 38.1 billion of imports and dollar 23.1 billion of exports, country's trade deficit stood at a very high level of dollar 15 billion as against dollar 14 billion in the same period last year. Services sector deficit, with dollar 4.95 billion of exports and dollar 7.01 billion of imports, was also higher at dollar 2.07 billion as against dollar 1.32 billion in the corresponding period last year. With dollar 475 million of inflows and dollar 4.12 billion of outflows, income deficit also amounted to dollar 3.64 billion.
The latest data on C/A deficit is certainly disturbing for a number of reasons as it could have severe implications for the level of foreign exchange reserves of the country, value of the rupee, investors' confidence, industrial activity, inflation, credit rating of the country etc. The fact that these aggregates are not negatively affected is due to an improvement in the overall balance of payments position brought about mainly by dollar 2 billion received through Eurobond auction in the international market, an unexpected grant of dollar 1.5 billion from Saudi Arabia and two tranches from the International Monetary Fund on account of EFF. However, it needs to be stressed that these are one-off receipts or high-cost borrowings, which would increase outstanding external indebtedness and debt servicing of the country a great deal. Although these receipts have improved the market sentiment as reflected in the appreciation of the exchange rate, yet it is the autonomous inflows included in the C/A balance, which are important to gauge the overall trends in the external sector of a country. Therefore it is extremely crucial to increase the level of exports, contain imports, and raise the level of home remittances to the maximum extent possible. While the Finance Minister has promised to take certain initiatives to increase home remittances, productivity of the country, which could expand the level of exports and narrow the merchandise account deficit, is still held hostage to adverse factors such as energy shortages, war on terror and political tensions. Both foreign and local investors are also still hesitant to tie their fortunes with the country and expand their businesses as suggested by the latest data on investment.
Anyhow, the recent euphoria of the government's top officials about the external sector improvements, particularly appreciation of the rupee and increase in foreign exchange reserves, needs to be put into proper perspective and should not lull the authorities into complacency. All-out efforts are needed to be made to encourage exports through higher productivity and contain imports by producing domestic substitutes as well as by providing incentives to the expatriates to send more money back home for maintenance of their families and investment. Foreign borrowings, grants or sale of family silver could support the balance of payments temporarily but is not a durable solution of the structural problem in the external sector. At the same time, the obsession or temptation to keep the exchange rate overvalued by the government or the SBP should be avoided at all costs and the rupee should be allowed to find its own value in the market. There are even apprehensions that the recent incentives provided to exports by the European Union would not be able to bring a positive change if the rupee parity continues to remain at the present level for a longer period. The effort should be to attain a sustainable position in the external sector account without relying too much on the bilateral and multilateral inflows, which may increase the debt servicing of the country excessively. In our view, the government has to work vigorously on a number of fronts and review the Pakistan Remittance Initiative (PRI) to ensure that the recent deterioration in the C/A balance is reversed. We know that the task at hand is profound but there is no other alternative to preserve the country's external solvency on a lasting basis.