All said, numbers are alarmingly high as imports crossed $5 billion a month for the first time in June; while the exports came at $1.9 billion - the 2.5 times gap is very high. Full year imports stood at $48.5 billion (up by 18%), on the flipside exports fell by 1 percent to $21.6 billion. Trade deficit of goods increased by two fifth to $26.9 billion.
The question is that how much of imports are due to expansion and by how much the growth would normalize in the years to come? There are one-off higher machinery imports of power projects including both CPEC (Sahiwal coal project etc) and non-CPEC government projects (3 RLNG plants etc) - but not all is still reflecting in SBP data as machinery imports stood at $7.1 billion (up by (9% YoY). However, the PBS numbers show machinery imports at $10.8 billion.
The trend of high machinery import may continue in FY18 as Engro and Hubco machineries would arrive, and cement sector machinery imports would also rise. High fuel import would as a resultant is very much in the offing.
The IMF expects imports to reach $52.8 billion in FY18 while exports are expected to inch up to $23.8 billion - the trade deficit would stand at $24.8 billion. The deficit growth projected by IMF is conservative. The fund expects FY18 CAD at $11.6 billion.
Let’s run an analysis on the IMF’s number - for the reserves to be intact at current levels, external financing needs would be around $13.6 billion in FY18 - the FDI is expected at $2.5 billion while the rest would be filled by debt. Adjusting for amortization, net debt is projected to increase by $8 billion to $87 billion and the trend would continue in the years to come.
The size of the economy would keep on growing without any meaningful plans of growth in foreign exchange earnings, debt would keep on piling to keep reserves at current levels. The IMF expects economy to grow between 5-6 percent till FY22 and external debt to pile up from $79 billion to $115 billion in five years.
That is a few billion dollars of debt too many; and the inherit assumption is that no crisis will hit the economy in the process and the external funding would keep on coming without knocking the door of the fund. That is a generous assumption. The question is for how long this trend would continue and more important point is longer the debt bubble is stretched, higher is the impact of burst.
The only sane way to deal is to start thinking and implementing on plans of expanding exports base and think of channeling higher remittances today. It would not take anything less than 3-5 years for making policies effective, which implies the planning starts today. The need is to move away from protectionist policies that is isolating Pakistan from global economies.
The need is to earn trust of overseas Pakistani to start bringing brain and capital back in the country, and for the elite to bring assets back in the country. Without it, the growth story is short lived - it may not break next year; but surely it is not sustainable.
The current account deficit is too high; but the reserves are not falling as debt is accumulating, and this will continue till the debt is hard to acquire. There is no change expected in upcoming monetary policy as inflation is well in control today and raising interest rates would neither be able to boost exports nor will bring foreign capital in the country.