Current deficit

The narrative of economic recovery suffered a setback when the State Bank of Pakistan (SBP) revealed figures for the Pakistani economy during July-January 2016-17. The exports situation has continued to worsen as the cost of imports has gone up. This has increased Pakistan’s current account deficit by 90 percent compared to the first seven months of the last fiscal year. The current account deficit for the first seven months of this year makes 2.5 percent of the GDP compared to the 1.5 percent from the same period last year. One percent may not seem too high but the net difference of a negative $2.3 billion between the two years will be hard to get back soon. The ballooning current account deficit has also been affected by a higher trade gap and a slowdown in workers’ remittances. The importance of the success of the exports package announced by the government is even more pertinent now. The package itself has drawn criticism for failing to identify and solve the problem of competitiveness in Pakistan’s major export sectors. The slowdown in the global economy has also limited new demand for Pakistani exports.

The reality is that there is no short-term solution to Pakistan’s exports problem. Exports went down from $12 billion to $11.7 billion, while imports went up from $25.6 billion to $29.1 billion. There is a bigger threat to remittances from overseas Pakistanis. Remittances went down by around 1.9 percent. This is no surprise in a year when Pakistani workers in Saudi Arabia have not been paid for months — with 40,000 of them deported back home in recent weeks. In such a situation, an improvement in the country’s balance of payments does not seem to be anywhere in the near future. Rising oil prices – a factor that is out of the government’s control — have been a major contributor to the rise. Improvement in Foreign Direct Investment (FDI) has also been slow. While FDI in the seven-month period improved from $1 billion to $1.1 billion, most of the investment came from Dutch companies. What is strange about the FDI figures is that the promised Chinese investment is not showing up. With a promise of upwards of $45 billion in investment in five years, the FDI figures should be showing a significant increase. There needs to be a recognition that the current account deficit will continue to grow if Pakistan’s economy is to grow above 5 percent; the country simply does not produce the high-end machinery required for new power generation and other industrial plants. Until Pakistan is able to bring its current account deficit under control, the trend of borrowing from outside the country will continue. So, although for now Pakistan’s foreign exchange reserves remain in a healthy position, the increase in the country’s current account will be a major worry for the economic managers of the country.