A weakening economy

As per the Pakistan Bureau of Statistics data, during FY08, the final year of the PML-Q government, the current account deficit shot up to $14.1 billion (8.2% of gross domestic product - GDP) from $6.87 billion (4.8% of GDP) as trade deficit increased to $20.91 billion (12.3% of GDP) from $13.56 billion (8.9% of GDP).The rupee-dollar parity, which remained relatively stable at about 60 in first four years of the government, increased to 68.3 by the close of FY08. Foreign exchange reserves fell to $11.28 billion at the end of FY08 from $15.18 billion in one year.In October 2008, a precarious BoP position forced the new government to sign a $7.6-billion loan agreement, which later was enhanced to $11.3 billion, with the IMF.Likewise, in September 2013, another agreement with the IMF was struck for $6.12-billion assistance by the PML-N government within three months of taking office.

History seems to be repeating itself. In the first nine months of the current fiscal year (July-March FY18), $12.46-billion current account deficit was registered compared with $8.35 billion recorded in the corresponding period of FY17, a rise of 49.22%.The current account deficit included $22.30 billion in trade deficit compared with $18.47 billion deficit recorded in July-March FY17, which represented 20.68% growth.In its report on Pakistan's economy released in March 2018, the IMF projected $15.7 billion (4.8% of GDP) of current account deficit for the full financial year. It forecast 10% export growth and 10.2% import growth, which would take exports to $22.46 billion and imports to $58.22 billion, thus resulting in $35.76-billion trade deficit.However, the JulyMarch FY18 data suggests that the IMF has underestimated the size of current account and trade deficits. Based on GDP growth of 5.8%, as forecast by the government for FY18, the projected GDP size for the outgoing fiscal year is $322.65 billion (FY17 GDP was $304.97 billion).Accordingly, at the current growth pace, the current account and trade deficits for FY18 will reach $19.59 billion (6.07% of GDP) and $39.32 billion (12.18% of GDP) respectively.

In FY17, the current account deficit was $13.13 billion or 4.1% of GDP while trade deficit was $32.58 billion or $10.68% of GDP. As per latest data released by the PBS, during FY18 (July-April), exports grew 13.67% to reach $19.2 billion while imports grew 14.04% to reach $49.41 billion, resulting in $30.21-billion trade deficit. At these rates of growth, the FY18 will end up with $37.22billion trade deficit ($23.42 billion of exports and $60.47 billion of imports), which will account for 11.53% of GDP. The worsening current account balance has taken its toll on the exchange rate stability and foreign exchange reserves. To ease the pressure, the government has to rely mainly on debt-creating instruments, such as sale of bonds and commercial loans, on which interest rate is relatively high. Public external debt, which was $64.48 billion at the close of 2016, had gone up to $73.72 billion at the end of 2017.

In the first seven months of FY18, the government borrowed $6.6 billion. In 2018, Pakistan will start repaying the $6.12-billion IMF loan, which would put further pressure on the BoP position.The FY19 budget has allocated Rs803.98 billion ($7.22 billion at an exchange rate of Rs115 per dollar) for the payment of principal and interest on foreign loans.A substantial increase in both exports and FDI is the key to reducing the external account deficit. However, it remains to be seen how the government tackles the situation.