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Saturday, April 13, 2024

Pakistan’s current account deficit increases by 50 %

News Analysis |

Pakistan’s current account deficit has witnessed a staggering increase of 50% in the current financial year (FY).

Pakistan’s economy continues to face upheavals as its reserves plunge as low as to merely cover a couple of months of imports, coupled with an acute fiscal deficit, making it even more troublesome for the beleaguered economy.

According to data released by the State Bank of Pakistan (SBP), the current account deficit of the country significantly rose to $10.826 billion during the current fiscal year so far (July-February) compared to $7.216bn in the same period in last FY.

Read more: Pakistan on its way to becoming a cashless economy

Government’s inability to address the rising concerns related to declining exports, ballooning external borrowing, and worrisome debt management along with failure to improve government revenues have put the government in a difficult position.

Moreover, ever-increasing circular debt in power sector and woeful spending in an election year in development programs to woe the voters has augmented the problems for the incumbent government.   

Despite the rhetoric over the projects under the celebrated China Pakistan Economic Corridor (CPEC), Pakistan has found itself caught in an acrimonious situation.

IMF in its First Post Program Monitoring discussions with Pakistan declared that “Pakistan’s near-term outlook for economic growth is broadly favorable”. But, at the same time, it concluded that “against the background of rising external and fiscal financing needs and declining reserves, risks to Pakistan’s medium-term capacity to repay the Fund have increased since completion of the Extended Fund Facility (EFF) arrangement in September 2016”.

Read more: State Bank optimistic after forecast growth in economy

Though the country has enough finance to cover few months ahead in short term, in the medium term it faces many challenges.

Initially, the government had artificially kept its currency stable which may have affected the exports dearly along with failure to formulate policies to bolster exports.

In the absence of adequate trade policies, despite the much-talked-about depreciation in rupee, Pakistani exports did manage to grow by 11% in the current FY, but it failed to avert the trade deficit. The growing gap between imports and exports has even worsened the position as per the data released on March 20.

Read more: Pakistan’s geostrategic environment and its impact on the economy

Experts have put forward a mechanism to improve the exports position.   “The five constraints which hamper the export position includes complex domestic and trade taxes regime, overvalued exchange rate, regulatory complexities, higher unit cost of electricity, fuel, and gas in comparison to competitor economies and weak trade facilitation,” according to SDPI’s Dr. Vaqar and Sajid Amin.

Though Pakistan’s position is strengthened due to encouraging export position, remittances but, due to depreciation, debt position has deteriorated even further, and Pakistan will have to pay even more on principal and interest servicing.

Though, many commentators believe it to be a much-needed and a right tool to lift the exports somehow to help bridge the gap between the growing twin deficits. But, fiscal indiscipline and failure to implement structural reforms and inadequate trade policy did not help the cause.

Read more: How Xi is ensuring that China’s economy remains strong

Despite the provision of agriculture subsidy, the depreciated rupee is unable to pay off the bulging twin deficit and increasing debt and liabilities. But the government is expected to improve the current account deficit by depreciating rupee even more than current 9.5% cumulative loss in rupee valuation, since December, to improve the current account deficit. 

Pakistan may not be in a position to have enough resources, which could be allocated for infrastructure and inclusive development. Moreover, due to widespread corruption and underutilization of loans on asset building, it may not be able to improve the financial perils for Pakistan as it continues to go in circles. 

The last ploy to depreciate rupee would further deepen the debt woes and will create even more burden of liabilities for next government.