Although fiscal and current account deficits tend to go in tandem, there are exceptions to it, abroad and at home.
Japan has been consistently running a huge fiscal deficit while maintaining a current account surplus. But its not fair and realistic to compare Pakistan with Japan.
Historically, economic crisis in Pakistan emanates from slippages in balance-of-payment and not from higher inflation or any other economic indicator. Cases in hand: 1998 and 2008.
In the difficult economic times of today, the only ray of hope is the surplus in current account balance that, for the first time in seven years, was in surplus, in the half year ending December 2010. By virtue of it and also IMFs support, the countrys foreign reserves are at a record high of $17.09 billion with the rupee being stable against the greenback for the past few months.
The surplus in current account also comes in contrast to SBPs projections of $2-2.5 billion deficit. In fact, even in the absence of the $743 million ($633mn in Dec & $110mn in Nov) inflows on Coalition Support Fund account, the current account deficit would still have been much lower than the initial estimates.
This CSF flow could be termed as a one-off flow. However, since the pending CSF amount is around $2 billion, more inflows in the latter part of the remaining fiscal year cannot be ruled out. Last year, all the CSF reimbursement of $1.3 billion took place in the second half, so around $500-700 million of further inflows are plausible in FY11.
The export goods growth of 19 percent, year-on-year, in the first half is doing the trick. Unlike FY08, when the rise in commodity prices was mainly due to soaring crude, the surge in cotton prices this time around is going in favour of the BoP account. However, one should still keep the fingers crossed for sharp northward movement in oil prices in the second half, which could partly offset the gains made through pricier cotton.
In the meanwhile, the 10 percent increase in import bill in the first half of the fiscal year hints that domestic demand for imported goods might not have responded to the tight monetary policy amid stagnating purchasing power. Nonetheless, the impact of increase in discount rate by 150 basis points in the last six months may slightly dent the demand in the remaining six months.
While the increase in workers remittances that is likely to continue with its handsome growth of 15-20 percent, may not let the current account go out of control, the price of crude oil, which is expected to head further north, could mitigate the impact of any fall in demand - giving room to import growth to outpace the growth in exports.
Barring CSF inflows, the average of $300-$400 million monthly deficit, owing to high oil prices, may push the current account gap beyond the $2 billion mark for FY11. Nonetheless, the CSF and other government services inflows may tone it down to around 1 percent of GDP or $1.5 billion.
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Pakistan 1HFY11 BoP Summary
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($ mn) 1HFY11 Y/Y Dec-10 M/M
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Current account balance 26 -101% 601 n.a
Goods: Exports f.o.b 11,125 19% 2,094 7%
Goods: Imports f.o.b 16,710 10% 3,091 10%
Trade Balance -5,585 -5% -997 17%
Balance on Goods & Services -6,080 -18% -454 -50%
Current Transfers.:Credit 7,622 18% 1,264 -6%
Remittances 5,291 17% 863 -7%
Foreign Direct Investment 829 -14% 256 144%
Foreign Portfolio Investment 222 -18% 49 -31%
Equit y Securities 233 -25% 55 49%
Debt Securities -11 -71% -6 N/M
Overall balance 979 -10% 874 N/M
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Source: State Bank of Pakistan