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.