CA deficit

The Pak Banker - - FRONT PAGE -

Pak­istan's Cur­rent Ac­count deficit has swelled to an all­time high of $18.9 bil­lion in the out­go­ing fi­nan­cial year 2017-18. The ris­ing CAD has been at­trib­uted to the bal­loon­ing trade deficit due to the con­tin­u­ous in­crease in im­ports and the slide of the Ru­pee against Dol­lar.Ac­cord­ing to State Bank of Pak­istan sta­tis­tics, the CAD was $12.6 bil­lion in FY17, show­ing a year-on-year in­crease of 50 per­cent.The cur­rent ac­count deficit is a desta­bi­liz­ing fac­tor for other macroe­co­nomic in­di­ca­tors as well. The bal­loon­ing trade deficit has re­sulted in the de­ple­tion of for­eign re­serves and the weak­en­ing of lo­cal cur­rency against the green­back.The coun­try's trade deficit recorded a his­tor­i­cal high at $36.2 bil­lion in the same fi­nan­cial year 2017-18. The im­bal­ance of pay­ments be­tween ex­ports and im­ports stood at $31 bil­lion in FY18.

The cur­rent ac­count deficit is the high­est the coun­try has faced in its his­tory. The deficit is due to the con­tin­u­a­tion of ma­chin­ery im­ports both for CPEC and non- CPEC en­ergy and in­fra­struc­ture projects, whereas, im­ports for plant upgra­da­tion un­der the on­go­ing ex­port pack­age for the tex­tiles sec­tor also added to the pres­sures. The re­cent SBP re­port said that the ab­so­lute mag­ni­tude of ma­chin­ery im­port pay­ments is still quite high, av­er­ag­ing S$ 720.2 mil­lion per month in FY18. The tim­ing of these higher pay­ments is not ideal as they have co­in­cided with in­creas­ing global crude prices.

There are two main wor­ries at this point: the coun­try's vul­ner­a­bil­ity to ex­ter­nal shocks, and its abil­ity to keep fi­nanc­ing the cur­rent ac­count deficit given the grad­ual ero­sion in its for­eign re­serves po­si­tion.How­ever, the coun­try's growth prospects are en­cour­ag­ing, with be­nign inflation and fa­vor­able out­looks for ex­ports and re­mit­tances, and some re­lief is ex­pected from re­duced non-en­ergy im­port pay­ments down the road.But, un­til there is a sig­nif­i­cant im­prove­ment in the cur­rent ac­count bal­ance, pres­sure will con­tinue to mount on the coun­try's re­serves. This, in turn, cre­ates the con­stant need to ar­range ex­ter­nal fi­nanc­ing so that the for­eign ex­change re­serves po­si­tion of­fers some level of com­fort.The cur­rent po­si­tion em­pha­sizes the need for declar­ing an eco­nomic emer­gency in the coun­try.The cen­tral bank re­cently raised the in­ter­est rate to 7.5pc from 6.5pc and al­lowed de­pre­ci­a­tion of the ru­pee to an un­ex­pected level. Both these de­ci­sions are de­signed to con­trib­ute to sta­bi­liz­ing the econ­omy in the longer run.

One of the ur­gent needs is to cur­tail im­ports. The im­port bill reached a high level of $60.86bn by end of June 2018, while ex­port pro­ceeds bought a mere $23.22bn, leav­ing a huge trade deficit of $37.64bn.The im­port bill went up de­spite the im­po­si­tion of reg­u­la­tory du­ties two times and other re­stric­tive mea­sures taken by the cen­tral bank in the out­go­ing fis­cal year. Ex­perts are of the view that more­ef­fort­sare needed to con­trol the ris­ing im­port bill and raise rev­enue for achiev­ing the cur­rent fis­cal year rev­enue tar­get. The gov­ern­ment has im­posed reg­u­la­tory du­ties on 1,500 tar­iff lines in 2017-18. Of these, the im­port of nearly 700 items slowed down con­sid­er­ably. The cus­toms de­part­ment now­pro­poses to raise reg­u­la­tory du­ties on those tar­iff lines im­port of which is still on the higher side.FBR has also rec­om­mended halt­ing fur­ther pref­er­en­tial agree­ments which are cur­rently un­der ne­go­ti­a­tions. Sim­i­larly, it is pro­posed to fur­ther im­pose reg­u­la­tory duty on those items which are presently al­lowed ei­ther at zero per­cent or pref­er­en­tial duty un­der the free trade agree­ments.All these mea­sures should go a long way to re­duce the CA deficit.

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