Pakistan’s economy is yet again in the grips of a widening current account deficit with the State Bank of Pakistan reporting the key macroeconomic indicator at $7 billion for the first five months of the ongoing financial year. This is in stark contrast to a current account surplus of $1.64 billion for the same period last year. What is more, the SBP had expected CAD to hover somewhere around four percent of GDP for the current fiscal year but having already reached 5.3 percent, that target is more than likely to be missed. Despite taking several measures to curtail it, the government been unable to stop the continuously increasing import bill that is causing the CAD to widen with each passing month, and if this trajectory holds, it could reach $15 billion by year end. There is an extent to which the government can go to reduce its import bill. Commodities such as oil, which account for most of the country’s imports, cannot be substituted. A significant amount in taxes is also raised through imports of goods and services as well, revenue that the government cannot let go of. Owing to these limitations, there is a need to increase exports and FDI to reduce the gap.
At the same time, the rupee is under pressure with foreign exchange reserves, almost entirely made up of borrowed dollars, dropping steadily, indicating reduced inflows. Separately, the IMF is unwilling to budge on key conditions that the government is having a tough time fulfilling. Further hikes in energy tariffs, removal of tax breaks to certain industries and increasing tax revenue are all measures that the IMF is demanding, which will fuel inflation and reduce disposable incomes. The resumption of the Fund’s $6 billion EFF is also contingent upon the satisfactory fulfilment of these inflationary conditions. The government’s inability to take timely measures that would have addressed some of the systemic underlying issues of the economy has landed the country in this mess. Lack of consistency and continuity in the economic team coupled with poor decision making has also made matters worse. As things stand, short of a drastic drop in international commodity prices, which would be a stroke of luck, the external account of the country will remain in the red.
