Current account woes
According to the latest reports, the government has decided to borrow seven billion dollars during the remaining months of the current fiscal year to bridge the widening current account deficit. This was revealed by a senior Finance Ministry official during a meeting of National Assembly's Standing Committee on Finance. As per the official's statement, "we are in a two-way crisis, current account deficit as well as debt is increasing." The latest data from the Federal Board of Revenue (FBR) shows that the JulyFebruary 2017-18 revenue collection increased by 17.65 percent against the target of 19 percent. It is unclear whether the Finance Ministry had included the FBR shortfall while estimating the quantum of reliance on borrowing for the remaining four months of the current fiscal year; and if not then actual borrowing would be higher by around 2 billion dollars.
The State Bank of Pakistan (SBP) in a statement has maintained that the country's financing requirements for the entire year would be between 15.5 billion dollars and 17 billion dollars. According to the SBP, "we are going to peak in the current fiscal year but things will ease from the next fiscal year with a slowdown in the China Pakistan Economic Corridor (CPEC)-related imports".
The admission of how the widening current account deficit would be plugged openly challenges the narrative of the PML-N government notably that growth momentum, backed by infrastructure development projects under the aegis of the CPEC, as well as adept handling of the macroeconomy has led to stabilization of the economy.
During the past two to three years, exports have been declining, attributed to an overvalued rupee that made our products uncompetitive in the international market, and inordinate delays in sales tax refunds with the objective of artificially shoring up revenue collection which negatively impacted on the liquidity needs of the exporters compelling them to borrow from the banks at rates that again made their products uncompetitive; while imports have been rising with tariff concessions extended to Chinese companies engaged in CPEC projects. The government's claim that capital imports have risen which, would in time, fuel the growth rate is not backed by data on the SBP website that shows a rise in import of fuel as well as transport equipment far outpacing a rise in machinery imports.
Remittances have been rising but are not enough to bridge the widening gap between exports and imports. However, one would assume that the Finance Ministry must be seriously concerned about the country being placed on the grey list by Financial Action Task Force (FATF) in June this year, a placement which would surely have implications on remittances as they are channeled through the Swift network operated from the US, a country that the Advisor to the Prime Minister on Finance, Revenue and Economic Affairs revealed had spearheaded the move to place Pakistan on the grey list. In other words, one may expect delays in remittance inflows and an overall decline is a distinct possibility.
If placed on the FATF, Pakistan would have difficulty in paying interest as well as principal when due on foreign loans. The government is considering issuing global bonds. However, these bonds, defined as debt equity, would probably be at high rates of return given the expectation of being placed on the grey list by FATF in June. In view of the gravity of the situation, it is imperative that a comprehensive strategy be formulated in consultation with all stakeholders to ensure that the country meets the challenge ahead in the best possible manner.