Dou­ble deficit

The Pak Banker - - FRONT PAGE -

The econ­omy is fac­ing the chal­lenge of dou­ble deficit. Ac­cord­ing to the lat­est fig­ures, the coun­try's trade deficit has widened to 17.96 bil­lion dol­lars dur­ing the first half of the cur­rent fis­cal year as com­pared to 14.42 bil­lion dol­lars deficit in the com­pa­ra­ble pe­riod of the year be­fore. Al­though ex­ports have slightly risen, it is yet to be de­ter­mined whether the rise in ex­ports is at­trib­ut­able to the ru­pee de­pre­ci­a­tion or a rise in the in­ter­na­tional price of our ma­jor ex­port items or whether this rise is due to a higher vol­ume of ex­ports or an amal­gam of all three. Re­mit­tances rose by 2.5 per­cent dur­ing the first half of 2018 to 9.7 bil­lion dol­lars.

Gains in ex­ports and re­mit­tances were much lower than the rise in im­ports dur­ing the pe­riod un­der re­view which in­creased by 19.1 per­cent to 28.97 bil­lion dol­lars in the first half of 2018 in com­par­i­son to the same pe­riod a year be­fore. The SBP web­site pro­vides data for the first five months of the cur­rent fis­cal year (July-Novem­ber) and notes that to­tal im­ports rose from 17.7 bil­lion dol­lars in 2016 to 21.8 bil­lion dol­lars in 2018 - a rise of 4.1 bil­lion dol­lars - out of which petroleum and prod­ucts im­ports ac­counted for 1.2 bil­lion dol­lars (from 4 bil­lion dol­lars to 5.2 bil­lion dol­lars) or around 30 per­cent. This was fol­lowed by ma­chin­ery im­ports that rose by 799 mil­lion dol­lars (with power and elec­tri­cal ma­chin­ery ac­count­ing for the bulk of the rise) ex­clud­ing tex­tile ma­chin­ery whose im­ports rose by 133 mil­lion dol­lars, and a rise of 308 mil­lion dol­lars of more im­ports by the trans­port group.

On the other hand, the bud­get deficit too con­tin­ues to widen and dur­ing the first five months of the fis­cal year has shot up to Rs826 bil­lion, which is more than half of the an­nual tar­get. The over­all bud­get deficit - gap be­tween ex­pen­di­tures and in­comes - has widened to 2.3% of Gross Do­mes­tic Prod­uct (GDP) or Rs826 bil­lion dur­ing the July-Novem­ber pe­riod of FY18. Th­ese fig­ures are star­tling and negate the fed­eral govern­ment's claim that it has re­versed the trend of the last fis­cal year when the bud­get deficit peaked to a his­toric high of Rs1.863 tril­lion. The trend shows that the an­nual bud­get deficit tar­get of 4.1% of GDP or Rs1.480 tril­lion that par­lia­ment had ap­proved in June last year has al­ready be­come un­re­al­is­tic in just five months. The fig­ures of the first five months sug­gest that the an­nual bud­get deficit may even ex­ceed last year's level of Rs1.863 tril­lion. Dur­ing the first half of the last fis­cal year, the fi­nance min­istry had booked Rs799 bil­lion or 2.4% of GDP bud­get deficit.

The bud­get deficit and the cur­rent ac­count deficit re­main the two big­gest chal­lenges for Pak­istan's econ­omy that over­shadow the govern­ment's eco­nomic per­for­mance in other ar­eas. Be­cause of th­ese twin deficits, there are ap­pre­hen­sions that Pak­istan may go back to the IMF for yet an­other bailout pack­age. Last month, the IMF stressed that Pak­istan needed to un­der­take strong re­forms to main­tain ex­ter­nal sta­bil­ity, en­sure debt sus­tain­abil­ity and sup­port higher eco­nomic growth in the medium term by con­tain­ing the bud­get deficit. One of the main rea­sons be­hind the Rs826-bil­lion bud­get deficit was bal­loon­ing debt ser­vic­ing re­pay­ments.

From July through Novem­ber of the cur­rent fis­cal year, the do­mes­tic and for­eign debt ser­vic­ing in­creased to roughly Rs625 bil­lion. The Rs625 bil­lion debt ser­vic­ing was al­most half of the an­nual bud­get ear­marked for this pur­pose. The govern­ment's grow­ing reliance on short-term do­mes­tic and for­eign bor­row­ings has sig­nif­i­cantly in­creased the debt ser­vic­ing cost. The 7.2% ru­pee de­val­u­a­tion since July last year would also in­crease the govern­ment's cost of ex­ter­nal debt ser­vic­ing. To deal with the sit­u­a­tion the govern­ment has no op­tion but to adopt strict aus­ter­ity mea­sures.

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