According to the latest data released by the State Bank of Pakistan, current account (C/A) deficit of the country widened by dollar 29 million to stand at dollar 2.486 billion in July-May of FY16 as compared to dollar 2.457 billion in the corresponding period last year.
The cumulative deficit on merchandise, services and income accounts stood at nearly dollar 23 billion as against dollar 22.37 billion in July-May, 2015. With dollar 20.13 billion of exports and dollar 36.52 billion of imports, deficit on merchandise account stood at a very high level of dollar 16.385 billion while deficit on services account was of the order of dollar 2.218 billion with dollar 4.98 billion of exports, dollar 7.20 billion of imports.
Income sector outflows were dollar 4.932 billion and inflows only dollar 538 million, depicting a deficit of dollar 4.394 billion during July-May, 2016.
The widening of C/A deficit during the first eleven months of the current fiscal year over the previous year was due entirely to a massive increase in C/A deficit during May, 2016 which stood at dollar 792 million in sharp contrast to a surplus of dollar 23 million in the same month last year.
Current account deficit during this month was also much larger than the average deficit in the first ten months of the current fiscal.
The latest data on the country’s current account balance was of course disturbing for a number of reasons. The developments during July-April, 2016 on this account had raised the expectations that C/A deficit during FY16 would be lower than last year but data during May, 2016, had dashed all these hopes.
If the latest trend continues, the external sector which was considered to be a source of stability and satisfaction up to now would re-emerge as a matter of great concern.
Another worrying aspect is that exports of the country are now substantially less than even half of the imports, oil prices in the international market are on a rising path, growth in home remittances has moderated and Pakistan would not receive funds from the IMF after the release of the latest tranche in September, 2016 under the EFF agreement with the Fund.
This suggests that the prospects of external sector would continue to be bleak in the foreseeable future. Yes, the CPEC could give some comfort to the C/A balance but the inflow from this source is contingent on many factors. It may also be noted that the amount coming from this source would be a loan which has to be utilised optimally and would increase debt servicing liability of the country in future.
Anyhow, it is not difficult to see that continuation of the present trend could lead to depletion of foreign exchange reserves of the country, depreciation of foreign exchange rate of the rupee, inflationary expectations and increase in external indebtedness.
In order to arrest the deteriorating trend in the external sector, particularly in the merchandise account, the government has announced several measures in the recent budget.
These include a reduction in the mark-up rate on Export Refinance Facility to 3.0 percent from 1st July, 2016, the establishment of a Technology Up-gradation Fund to encourage SMEs, zero-rating of export-oriented sectors and zero-rating facility on purchase of raw materials, intermediate goods and energy, ie, electricity, gas, furnace oil and coal and the promise of payment of all the pending sales tax refunds by 31st August, 2016 approved till 30th April, 2016.
We feel that these are good steps towards the promotion of exports but more needs to be done in this area to narrow the current account deficit. In particular, quality and quantity of exportable surpluses of the country have to be vastly improved through acceleration in the growth rate of the economy, adoption of latest technology in production and up-gradation of skills of manpower engaged in the export sector.
Moreover, there is an urgent need to diversify markets because our exports continue to be concentrated in a few traditional markets. PRI also seems to have lost its steam and needs to be reappraised.
All these steps would appear to be simple and straightforward on paper but it would take a lot of time and effort to move in this direction.
Overall, we feel that the government has to move very fast on a number of fronts and undertake various initiatives to ensure that external sector position of the country which is under pressure at the moment could change for the better.