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Twin Deficits: Skeletons In The Closet

With the affairs of Ministry of Finance now an open secret, the cat is finally out of the bag. The fresh statistics have exposed the cosmetic touches done to the economy causing concerns about long-term sustainability of the external sector. The current account deficit widened to US$ 5.0 billion during July-Oct FY18 as compared to $2.3 billion during the corresponding period in FY17. The good news is that Pakistan’s exports have seen an improvement during July-Oct FY18 growing at 11.3 percent as compared to the decline of 3.1 percent in the comparable period last year; and remittances have recorded a modest increase of 2.3 percent during July-Oct FY18. Despite this positive development, State Bank of Pakistan (SBP) foreign exchange reserves stand at $13.5 billion on November 17, 2017 down from $16.1 billion at end-June 2017, which means that during the last four months forex reserves have declined by about $2.6 billion.

In 2017-18, the reserves are expected to be slightly below the sum of the current account deficit and scheduled debt repayments, creating an external financing need. Since the IMF program came to an end a year ago, external economic indicators have started to deteriorate. The current account deficit has doubled to 4 percent of GDP or $12.1 billion, which should ring alarm bells in the concerned quarters of the government. Mounting debt and deficits in Pakistan is raising the prospect that an abrupt rise in interest rates or tougher borrowing conditions might be damaging.

Pakistan’s trade deficit ballooned to an all-time high of $32 billion in 2016-17, which was mainly due to declining exports and partly because of declining remittances from Pakistani expatriates. The total import bill for 2016-17 was $51 billion, whereas Pakistan’s exports had registered at $19 billion, hence trade deficit of $32 billion been recorded. It is unfortunate that despite fall in the oil prices in the international market, the gap between imports and exports continued to increase during the last three years.


The current account deficit is expected to remain high in fiscal year 2018, projected at 4.2 percent of GDP, with rising imports, declining remittances, and stagnant exports. Imports are expected to continue to increase as growth spurs domestic demand that domestic production cannot meet. Financing Pakistan’s burgeoning trade deficit remains a key challenge as remittance inflows, however, substantial, continue to fall. Worker remittances have shown some unexpected improvement, however, in the first 4 months of fiscal year 2018, increasing by 2.3 percent from the same period in fiscal year 2017. If this rebound can be sustained for the rest of fiscal year 2018, it may ameliorate the projected deficit. The share of exports in GDP nearly halved from 13 percent in fiscal year 2006 to a dismal 7.1 percent in fiscal year 2017. Exports fell annually by 2.5 percent on average from fiscal year 2013 to fiscal year 2017 due to lack of competitiveness and bad conditions for modernizing investment, leaving persistently low value addition to fetch low unit prices.

Total private investment during July-October was up by 78 percent which is $886.4 million compared to $499.1 million of corresponding period last year while numbers of FDI have also seen some good improvement, an increase of 74 percent that is $939.7 million compared to $538.7 million of the same period last year. Although most of the FDI was a portfolio investment made in the stock market, it was still considered satisfying. It remains to be seen whether this trend continues for the remaining period of 2017-18.

Pakistan is facing major challenges of growing public debt, stagnation in exports, widening of the current account deficit, overvaluation of the nominal and real effective exchange rates, slowing down of growth in credit to the private sector, expansion of the informal or underground economy and increase in income inequality, low tax to GDP ratio, circular debt and corruption. There is no dispute that Pakistan is fast running short of reserves which are hardly sufficient for three months of imports and that the government will have to earnestly concentrate on increasing exports, FDI and home remittances. Since exports could not be increased immediately, the importance of home remittances is gripping both official and unofficial quarters.

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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