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Triple deficits paralyze policy vision

The current account deficit during the first eight months (July-Feb) of this fiscal 2016-17 has reached $5.47 billion compared to $2.48 billion in the same period of the previous fiscal year. Analysts say lackluster exports, rising imports and weakening remittances are the major reasons behind this deficit. Pakistan’s trade deficit widens to 22 percent, stands at $9.3 billion. The rise in overall import payments was mainly driven by higher purchases of fuel and capital equipment. This is understandable given that Pakistan is transitioning from a low-growth to higher growth phase, and is addressing supply-side bottlenecks in energy and infrastructure.

Until the quarter ended September 30, 2016, the savings on oil import payments had been offsetting rising non-oil imports and partially compensating for declining exports. This, coupled with growing remittances (till FY16), had been providing adequate forex reserves cover to the external account and indirectly contributing to reserve accretion. However, this comfort has now started to diminish. A sizable increase in import payments in the first half of FY17, alongside non-receipt of the Coalition Support Fund and a fall in exports and remittances led to a significant widening in the current account deficit. Pakistan’s import bill may further increase with the surge in oil prices following the supply cut agreement between OPEC and key non-OPEC members in December 2016.

In a span of three years – i.e. from Q1-FY15 to Q1-FY17 – the cumulative decline in the country’s oil payments amounted to US$ 7.3 billion. This decline was almost entirely driven by the dramatic fall in oil prices, as quantum POL imports have been generally increasing during the period. This essentially provided room for the country to finance rising non-oil imports (including that of power generation and construction-related machinery for CPEC projects), without exerting any pressures on the external account.

But with oil payments rising in Q2-FY17 on a YoY basis for the first time from Q1-FY15 onwards, the overall import bill swelled 11.5 percent to US$11.2 billion in the quarter. Even though exports reversed their multi-year declining trend and rose 1.2 percent (to US$5.5 billion), this uptick was insufficient to offset the rise in the import bill. As a result, the trade deficit widened by 23.8 percent to US$ 5.7 billion in Q2-FY17 – the second-highest quarterly trade gap. This brought the half-year trade deficit to US$ 10.8 billion (against US$ 9.4 billion in H1-FY16), and pushed up the current account deficit to around US$ 3.5 billion.

Exports continue to decline in the third consecutive years due to waning global demand and weak international commodity prices as well as domestic structural issues, such power outages and lack of investment in modernization and currency appreciation in real effective terms. The widening current account deficit was also driven by a rise in overall balance of trade in goods and services, which soared to $19.76 billion in July-March FY17 as compared to $15.389 billion a year ago. Exports fell 3.06 percent to $15.119 billion, while imports rose 18.67 percent to $38.504 billion. That took the total trade deficit to $23.385 billion for the nine months of this fiscal year from $16.84 billion in the corresponding period of the last fiscal year.

An increase in oil price leads to inflation, increase budget deficit and puts downward pressure on exchange rate which makes imports more expensive. The increase in oil price has further effect on the daily consumption pattern of households. However, a lower government spending, a higher real stock price and a lower interest rate would raise real output for Pakistan. The antidote to the sky rocketing oil prices is a concerted effort to achieve major breakthrough in the areas of gas exploration, enhanced hydro power generation and coal-based energy production. The silver lining is that increased oil prices will push up economic growth in Gulf countries, which are a major source of remittances for Pakistan. Needless to say, the remittances are one factor that has sustained the economy over past several years.

The World Bank in its latest report projected that fiscal deficit was projected to be 4.8 percent in FY2017 as against 4.1 percent revised target of the government. This widening is primarily driven by slower increase in government tax revenues (both federal and provincial) coupled with decline in non-tax revenues. The shortfall in tax and non-tax collection would mean more domestic and foreign borrowings to bridge the budget deficit. The government has planned to raise Rs1,900 billion through the sale of treasury bills to banks during the last quarter for the current fiscal year to meet the budgetary financing.

The FBR’s inability to generate desired tax revenues and lower than expected non-tax revenue collection mainly on account of non-reimbursement from USA in shape of Coalition Support Fund (CSF) and reduced SBP’s profit in the wake of lower interest rates could be cited among the major reasons for overall lower tax collection and unbridled expenditures where there is less room for maneuvering because of committed main expenditures heads put pressure on the country’s fiscal accounts during the current fiscal year.

Pakistan’s growth prospects continue to improve if inflation remains contained. However, weak fiscal performance and pressures in the external account pose a challenge. Efforts to reverse the current imbalances and continued implementation of structural reforms would be needed for sustaining and accelerating growth and improving welfare.

The writer is a Karachi-based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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