Generally, there are misconceptions that current account deficit (CAD) and depreciation of currency are bad omen for any given economy. Talking of current account deficit, it is quite natural for developing economies to have high current account deficit as it indicates faster growth. In any economy goods and services can be either consume, saved or invested. A country with a current account deficit indicates that it is investing more than it is saving, therefore a current account imbalance can simply be viewed as the difference between saving and investment.Historically Pakistan has had a low savings and investment rate. High domestic investment is needed to accelerate GDP therefore if domestic saving is insufficient to finance domestic investment, it will be financed by investment from abroad. These capital flows are a credit on the capital account and should be matched by a deficit on the current account. Investments under China-Pakistan Economic Corridor (CPEC) are to be understood in this context.
In February, current account deficit was contained to $ 1.2 billion only as a result of which 8-months (Jul-Feb) deficit figure stood at $10.8 billion. However, it would be wrong to attribute this ‘decline’ to round one of rupee devaluation in December 2017. While imports (other than petroleum) have declined and exports have shown a marginal increase, the effects of second round of exchange rate adjustment during March 2018 will be off-setagainst rising oil imports as a result of high power consumption during summer. Hence, the frequency with which the tool of devaluation is being used calls for prudence as it may result in inflation and swell our per capita debt.
Pakistan’s public debt is estimated at 59 percent of the country’s gross domestic product, it ranks 77th in the list of 207 countries. What really matters is the purpose for which the government borrows. Where the government needs to be concerned is the fiscal and monetary slippages. Exchange rate adjustment along with tightening the monetary and fiscal policy is implied to correct the balance of payments disequilibria and for macroeconomic stabilization. Trade gap is still too high and will remain a cause of concern in medium to long term. The trade deficit of goods stood at $19.7 billion, up by 22 percent year on year. The remittances which used to virtually fully cover the trade deficit a couple of years ago, managed to finance only 65 percent of trade deficit in Jul-Feb18. The remittances grew by only 3 percent in Jul-Feb while on monthly basis it fell by 12 percent in February. And the depreciation may not help remittances to revive as the number of Pakistani workers going abroad has shown a significant decline.
The main problem lies in financing the current account deficit. The FDI at best may fill one fifth of the CAD in FY18 and rest has to come in the form of soft and commercial loans. The story of economic growth is hinged upon external balance and that is dependent upon materialization of debt. The economy may keep on growing as long as the debt is coming to finance the saving investment gap.
Pakistan has less than one percent of its GDP flowing in as FDI. Through better governance, simplifying the taxation system and introducing a value-added tax the government can attract more FDI; allowing the country to seize the opportunity without destabilizing its growth trajectory.
Recently, Unilever, a consumer goods giant has announced Foreign Direct Investment (FDI) of $120 million as an acknowledgement of the country’s growth highlighting that Pakistan has long been on the radar of foreign investors.