Double deficit
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.