Improvement in Current Account

Thanks mainly to a sharp reduction in oil prices in the international market and a consistent increase in home remittances, current account (C/A) balance of the country has shown a considerable improvement in recent months. According to the latest data released by the State Bank on 19th October, the country's current account deficit stood much lower at only dollar 109 million during July-September 2015, showing a tremendous decline of 93 percent over dollar 1.631 billion deficit witnessed in the corresponding period last year. All the major components of the C/A have shown positive trends. Deficit for trade, services and income stood at dollar 5.687 billion in the first quarter of the current fiscal as against dollar 7.554 billion in the same period last year, depicting a decline of 25 percent or dollar 1.867 billion. Country's overall merchandise deficit stood at dollar 4.522 billion with dollar 5.421 billion of exports and dollar 9.943 billion of imports as compared to a deficit of dollar 6.054 billion in the same period of last year. Services sector also performed better as its deficit was down by 76 percent to stand at only dollar 155 million. Similarly, income sector deficit also was lower at dollar 1 billion during the first three months of the current fiscal. Another welcome news was the posting of a C/A surplus of dollar 306 million in September, 2015 as against a deficit of dollar 240 million recorded a month earlier.
Such a substantial improvement in the foreign sector account of the country is, of course, a positive development for the economy of the country. It would reduce the need to borrow from outside sources, help maintain the existing level of foreign exchange reserves of the country and stabilise the exchange rate of the country. Foreign exchange reserves presently at a record level of about dollar 20 billion is mainly a reflection of improved C/A balance. In addition, foreign investors would feel more comfortable about the solvency of the country, imports would not be constrained, price pressures would be contained and credit rating of the country would not deteriorate. However, it needs to be remembered that some of the factors behind the improvement in C/A balance could be transitory. Pakistan received dollar 376 million from the US under the CSF during the quarter and this inflow is not likely to last. Also, there is no guarantee that weak international oil prices and increasing remittances would continue to provide a cushion to the C/A balance in future.
While welcoming the news of improvement in the C/A balance, it needs to be noted that authorities of the country still continue to borrow through the floatation of Sukuk, etc, which would invariably increase the outstanding stock of external debt of the country. Therefore, the ultimate target should be the elimination of C/A deficit altogether, primarily through the increase in exports and reducing dependence on home remittances and debt creating inflows, etc. However, a sustainable growth in exports is not easy when production cannot be enhanced due to acute energy shortages, poor infrastructure and uncertainty about the government policies. Some of the analysts and exporters are advocating a devaluation of the Pak rupee in order to increase the level of exports and narrow the trade gap. Although such a policy option appears to be quite plausible, the contrasting view is that there is no need to devalue when there is ample availability of dollars in the market, the rate between the open and interbank is so close and the value of the rupee is, more or less, market determined. However, we feel that policies must be framed and implemented as soon as possible to enhance productivity of the economy and increase exports so that external sector account of the country gets a boost on a sustainable basis and the reliance on outside sources could be reduced to the minimum.