It is heartbreaking to observe that the current account (C/A) deficit of Pakistan continues to increase. Rising current account deficit has put the exchange rate under pressure and it is affecting the country’s external sector. It shows the country is a net borrower from the rest of the world and uses foreign funds to meet its domestic requirements.
According to the latest data released by the State Bank of Pakistan (SBP), the C/A deficit broadened by more than 120 percent to $5.47 billion during the first eight months of the current fiscal (July-February, 2017) as compared to $2.48 billion recorded in the same period of last year.
The increase in deficit was mainly due to the rise in trade and services deficits together with a fall in home remittances.
The deficit in trade account amounted to $15.4 billion in July-February, 2017, up 26.8 percent from a year ago. This was due to an increase in imports by 11.2 percent and a drop of 2 percent in exports. Service sector’s exports were recorded at $3.5 billion as against the imports of $5.5 billion. This has resulted in a deficit of $2 billion as against the deficit of $1.9 billion in the corresponding period of last year.
Home remittances which have been contributing massive support to C/A balance declined to $12.3 billion in the ongoing fiscal year as against to $12.6 billion in the same period of last year.
Remittances from overseas Pakistanis shrank 2.5 percent during the period under review. Low oil prices have forced oil-rich nations of the Middle East to curtail their fiscal spending. This has resulted in job losses and reduced disposable income for Pakistani expatriates in the Gulf region.
Remittances from Saudi Arabia, United Arab Emirates and United States declined 6.8 percent, 1.6 percent and 2.5 percent, respectively, over the eight-month period
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.
The worsening of C/A deficit has serious implications for the level of foreign exchange reserves of the country, value of the rupee, investor confidence, inflation, etc.
Pakistan has no other substitute 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.
The government has announced certain relief packages for expert-oriented sectors like textile and clothing but exports continue to decline.
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 China Pakistan Economic Corridor (CPEC).
Imports are partly rising due to the increased economic activity as part of China-Pakistan Economic Corridor (CPEC).
The construction projects under the CPEC require heavy machinery that has to be imported. The economy is currently being led by investments rather than consumption.
Low oil prices have forced oil-rich nations of the Middle East to reduce their spending on infrastructural development, resulting in job losses.
At a recent press conference, SBP Governor Ashraf Mahmood Wathra downplayed concerns over the rise in imports since the beginning of 2016-17. He said imports included $6 billion of capital goods, which would eventually help grow exports and reduce the trade deficit.
The government has also announced a number of relief packages for export-oriented sectors like textile and clothing, but exports have continued their slide nonetheless. The latest in the series is a Rs180 billion subsidy package for the textile, clothing, sports, surgical, leather and carpet sectors, which will remain effective until June 30, 2018.
According to the SBP, growing exports is going to be “somewhat more challenging” in view of the recent wave of anti-trade sentiment in the United States and European Union, which are Pakistan’s largest export destinations.
Economic Coordination Committee (ECC) of the Cabinet, showed concern over the widening of current account deficit stressing need to increase exports of goods and services to bridge the gap.
The committee observed decline in wood products, leather products, engineering products, chemicals as well as coke and petroleum products. The committee was also informed that Large Scale Manufacturing is continuously moving upward as in November and December the growth remained 7 percent over last year.
The sectors which showing positive growth are iron and steel products which increased by 15.63 percent, electronics 14.35 percent, non metallic mineral products 9.31 percent, pharmaceuticals 7.90 percent, food beverages & tobacco 6.95 percent, automobiles 6.67 percent, paper & board 5.69 percent, fertilizers 3.47 percent , rubber products 0.45 percent and textile 0.14 percent.
The committee was informed that outlook of industrial sector is positive and encouraging. The industrial sector is improving due to persistent growth in electricity generation and gas production. Sharp increase in imports, however, may not be a cause for major worry, according to experts.