Depressing facts and figures
It is very ironic that the country is facing a grim situation on the external front but our finance minister Dar and his team of economists do not appear to be much concerned about the vulnerabilities of the foreign sector. Indeed, they are telling the pubic that there is no real cause of worry because the challenge of widening C/A deficit could be overcome through more foreign loans. Such a policy is not only unsustainable but will force the country to borrow heavily from abroad, drawdown its reserves and negotiate another programme with the IMF. In our view, government needs to act proactively before reaching such a stage.
Economic experts say that it is depressing to see that current account (C/A) deficit of the country continues to increase. According to latest data, the C/A deficit has widened by more than 120 percent during the first eight months of the current fiscal year.
The increase in deficit was attributable mainly to the rise in trade and services deficits together with a fall in home remittances. The deficit in trade account is up 26.8 percent from a year ago and this was the result of an increase in imports by 11.2 percent and a drop of 2 percent in exports. Service sector’s exports were recorded at dollar 3.5 billion as against the imports of dollar 5.5 billion, resulting in a deficit of dollar 2 billion as against the deficit of dollar 1.9 billion in the corresponding period of last year.
Home remittances which have been contributing massive support to C/A balance declined to dollar 12.3 billion in the ongoing fiscal year as against dollar 12.6 billion in the same period of last year. The current account deficit stood at 2.6 percent of GDP in July-February, 2017 as compared to 1.3 percent during the same period of last year and if this trend continues, overall C/A deficit could be nearly as high as 3.9 percent of GDP in 2016-17.
No this is a woeful condition because of its severe implications for the level of foreign exchange reserves of the country, value of the rupee, investor confidence, inflation, etc. The fact that these aggregates were not adversely affected so far was due to certain one-off receipts or short-term borrowings like the receipts from Eurobond and Sukuk auctions, CSF inflows, etc. As these sources are not sustainable, Pakistan obviously has no other alternative but to increase exports, contain imports and raise remittances not only to have a proper balance in the foreign sector but to have enough foreign exchange to service the rising level of external debt. However the obstacles in making the necessary headway in these areas are quite formidable.
For example in such scenario enhancing the exports is going to be quite challenging in view of the protectionist tendencies in the US and the European Union, trade restrictive measures in most of the other countries, subdued productivity of the economy due to a variety of factors and loss of competitiveness in the international market.
It may be recalled here that the government has announced certain relief packages for expert-oriented sectors like textile and clothing but exports continue to slide, nonetheless. As far as imports are concerned, SBP has recently imposed a 100 percent cash margin requirement to contain the imports of about 400 non-essential items such as mobile phones and household electrical appliances but any decline in their import is expected to be offset by higher imports under the CPEC.
On the other hand, the home remittances too constitute a formidable challenge. Low oil prices have forced oil-rich nations of the Middle East to reduce their spending on infrastructural development, resulting in job losses and reduced disposable income for the Pakistani expatriates.
Exports have to be enhanced substantially by improving the growth rate of the economy by well over 5 percent and by letting the Pak rupee find its true value in the exchange market freely in order to increase Pakistan’s competitiveness in the international market.
Tariffs and customs duties need to be reviewed to reduce imports, particularly of non-essential items. Pakistan Remittance Initiative has lost its steam and needs to be improved urgently to raise remittances while government should try to negotiate with friendly Middle Eastern countries not to retrench our labour force. In short, authorities of the country need to work harder on a number of fronts to remove the growing weaknesses in the external sector without any further loss of time. The projected shortfall from the budgeted non-tax revenue must be an additional source of serious concern for the Dar-led Finance Ministry due to two prevalent factors.
First and foremost, the United States recently released 350 million dollars under the Coalition Support Fund (CSF), as per a press release by the SBP- equivalent to around 36.5 billion rupees at the rupee-dollar parity of 104.5. Given that the budget documents for the current year projected CSF inflows of 170.7 billion rupees this release, if not backed by additional disbursements by June this year, would imply a shortfall of 134 billion rupees.
The possibility of additional disbursements under this head would be revealed in the Trump administration’s first budget that as per US Embassy sources, has not been firmed up yet. However there is a concern that CSF may dry up completely given the different focus of the incumbent US administration relative to its predecessor’s.