Ex­ter­nal ac­counts

The Pak Banker - - FRONT PAGE -

Ac­cord­ing to re­ports by a num­ber of in­ter­na­tional fi­nan­cial in­sti­tu­tions, Pak­istan is fac­ing se­vere ex­ter­nal pres­sure, aris­ing from in­creas­ing im­ports of cap­i­tal goods as well as in­vest­ments un­der the China Pak­istan Eco­nomic Cor­ri­dor (CPEC). This pres­sure has been in­creas­ing fast. While for­eign ex­change re­serves have been dwin­dling, cur­rent ac­count deficit of dol­lar 18 bil­lion in FY18 has eroded the coun­try's abil­ity to meet ex­ter­nal obli­ga­tions. The coun­try's im­ports which had be­come a great con­cern could not be cur­tailed de­spite cer­tain steps taken by the PML-N and Care­taker govern­ments to halt the widen­ing trade deficit. The cov­er­age for ex­ter­nal debt ser­vic­ing, though ad­e­quate at the moment, could weaken in the medium-term.

It is rel­e­vant to point out here that forex re­serves held by the SBP de­creased by dol­lar 5.1 bil­lion in FY18, fall­ing from dol­lar 14.58 bil­lion in July, 2017 to dol­lar 9.5 bil­lion in July, 2018. In its last pol­icy de­ci­sion, the SBP had in­creased in­ter­est rate by 100 ba­sis points to 7.5 per­cent in a bid to cool down the heat­ing econ­omy and control ris­ing in­fla­tion. This would fur­ther weaken the gov­ern­ment's frag­ile fis­cal po­si­tion. Pak­istan's debt af­ford­abil­ity has weak­ened sig­nif­i­cantly from al­ready low lev­els in the event of a sharp and sus­tained in­crease in the cost of debt. The C/A deficit stood at dol­lar 18 bil­lion or 5.7 per­cent of GDP dur­ing FY18. Though Pak­istan con­tin­ued to bor­row mainly from bi­lat­eral sources dur­ing the year, for­eign ex­change re­serves de­clined by over dol­lar 5 bil­lion dur­ing 2017-18 to stand at dol­lar 9.5 bil­lion or equiv­a­lent to about two months of im­ports.

Need­less to say, the forex re­serves would de­crease to dan­ger­ously low lev­els if the C/A deficit is not cur­tailed sub­stan­tially. Re­al­iz­ing the grav­ity of the sit­u­a­tion, the newly-elected gov­ern­ment seems in­clined to ap­proach the In­ter­na­tional Mon­e­tary Fund for a bailout pack­age although it is also con­sid­er­ing other op­tions like bor­row­ings from other coun­tries, float­ing bonds for the ex­pa­tri­ate com­mu­nity and a dras­tic cut in non-es­sen­tial im­ports. The im­ports are ris­ing due to in­creas­ing do­mes­tic de­mand. The ex­pan­sion­ary fis­cal pol­icy of the coun­try has cer­tainly added to do­mes­tic de­mand. Dur­ing FY18, over­all fis­cal deficit of the coun­try hit a five-year high of 6.6 per­cent of GDP or Rs 2260 bil­lion and the cur­rent fis­cal year is not go­ing to be dif­fer­ent. The rise in the in­ter­est rate struc­ture and a sub­stan­tial de­pre­ci­a­tion of the ru­pee would raise debt ser­vic­ing cost and in­crease ex­pen­di­tures on im­ported goods.

An­other rea­son for higher im­ports is the heavy in­vest­ments re­lated to the CPEC. Pak­istan has a dol­lar 56 bil­lion agree­ment with China un­der this ar­range­ment and its ex­ports to Pak­istan reached dol­lar 11.45 bil­lion dur­ing FY18. Moody's rat­ing agency re­cently said that the C/A deficit is likely to set­tle lower at 4.8 per­cent of GDP dur­ing FY19, down from 5.7 per­cent in FY18. It is dif­fi­cult to agree with this state­ment be­cause of the im­prob­a­bil­ity of such a large de­cline in the C/A deficit in the ab­sence of dras­tic changes in ex­ter­nal sec­tor poli­cies or in the terms, con­di­tions and cal­cu­la­tions in the CPEC-re­lated projects.

Any­how, C/A deficit has amounted to about dol­lar 2.2 bil­lion dur­ing July, 2018 which is not a good omen. Also, Moody's has em­pha­sized that a rise in pol­icy rate would weaken the gov­ern­ment's fi­nances. Although there is noth­ing wrong with this state­ment; mon­e­tary pol­icy of the coun­try is al­ways de­pen­dent on in­fla­tion­ary pres­sures in the econ­omy and C/A bal­ance can­not be made hostage to fis­cal pol­icy of the gov­ern­ment. The new PTI gov­ern­ment will have to act very care­fully in or­der to tackle the cri­sis in the ex­ter­nal sec­tor.

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