There is bad news on the economic front. The current account deficit stood at $1.6 billion in January - third highest ever in our history. The forex reserves are depleting fast and the money raised by Eurobond/Sukuk in Dec has all evaporated. The CA deficit for the first seven months of the current fiscal year is estimated at $9.2 billion (4.7% of GDP), up by 48 percent or $3 billion year on year basis. The main reason is the rising volume of imports which are unstoppable despite the currency adjustment in December. The bill was $4.9 billion in Jan, the second highest ever. The total so far stands at $31 billion, an increase of 18 percent on yearly basis. The biggest challenge in the short to medium term is to slow down the runaway imports growth.
Exports are up but they are too low to impact the current account imbalance. Exports came in at $2.1 billion in January which is still short by $500 million from its peak in June 11.The trade deficit is still too high to tame CAD and at this pace, the CAD is likely to reach $16-17 billion (4.8-5% of GDP). That is too high a number and increases the gross financing requirement for not letting the reserves to come down any further. The good news is that Pakistan has got three months' extension on FATF which gives an opportunity for government to raise some loans from global capital market and short term financing from commercial banks. The inflows from western multilaterals (WB, ADB, IDB etc) are contingent upon IMF's letter of recommendation. The Fund's post monitoring report was due in Feb and has now been shifted to the start of March.
The CAD may hover around the upper band of revised target of 4-5 percent of GDP while the fiscal deficit is surely to be shy of 4.1 percent of GDP. There might not be much debate on inflation which may remain in single digits even in FY19. The question is on the fate of fiscal deficit as how would it impact the external imbalances and what are the austerity measures government should take to control the imbalances. The consolidated fiscal deficit stood at 2.2 percent of GDP (Rs796bn) in the first half of the year as compared to 2.5 percent of GDP last year. The low fiscal deficit in the second quarter is due to welcome growth in revenues, especially tax revenues and surpluses shown by provinces. Barring provincial surpluses, the federal fiscal deficit stood at 2.6 percent of GDP. In FY17 the provinces shown combined deficit of Rs163 billion versus budgeted surplus.
On tax revenue front, the government is making progress. FBR tax collection increased by 19 percent, while overall tax revenues grew by 18 percent. The problem is non-tax revenues where Rs300 billon collection in the first six months is around one-fourth of the yearly target. Hence, the shortfall in non-tax revenues and surge in development expenditure would result in slippage in the fiscal deficit from the targeted numbers. The development spending is growing rapidly, up by 25 percent year-on-year, to reach Rs559 billion. The federal government has so far spent Rs248 billion in the first half out of Rs1,001 billion for the whole year. The government would not be shy of spending in the second half and that would exert pressure not only on fiscal deficit but on current account as well. All said, fiscal deficit is the root of the problem which must be tackled at all cost.