IF the deficit in the current account is huge but overall balance of payments is positive, what does it mean?

It means inflows of foreign investment are either too thick or the country’s external borrowing is high. Inflows of foreign direct and portfolio investment in Pakistan are quite moderate, with the country borrowing from external sources.

But this time, we’re not borrowing from the International Monetary Fund (IMF). We are rather borrowing from international investors through traditional and Islamic bonds. That is, we are keeping our balance of payments in shape by increasing already fat forex liabilities.

In the first half of this fiscal year, the current account deficit expanded to $7.4 billion from $6.43bn a month ago. Though the overall balance of payments was still in surplus — thanks to an increase in forex liabilities — it fell to $1.859bn in July-December from $3.291bn in July-November. The pace of expansion in the current account deficit and a simultaneous squeeze in balance of payments surplus is quite alarming, to say the least.

Exports of goods and services and home remittances are growing but not fast enough to even feed the trade deficit of merchandise trade. Besides, outward repatriation of funds by multinational companies and foreign nationals working in Pakistan is gathering pace. So, the current account deficit will not see an impressive squeeze, at least not till the end of this fiscal year.

The rupee depreciation is now being seen by many as too little, too late — unable to make a big difference in exports this fiscal year. The narrative states that if former finance minister Ishaq Dar had not reversed State Bank of Pakistan’s July 5, 2017 decision to let the rupee fall, the impact on exports would have been greater.

Still, as the rupee’s inevitable decline began on Nov 8, with the SBP loosening the effective forex trade band, exports growth in November and December can partly be attributed to it.

Federal government officials hope that merchandise exports will reach $23bn this fiscal year from $20.448bn in 2016-17. Exports rose 11pc year-on-year to $11bn in July-December.

The economy continues its upward trajectory but sources of concern remain

But the real problem lies in imports of goods that consumed $53bn in the previous fiscal year and are expected to touch $60bn during this year. This means that even if we view the situation through the most optimistic lens, a huge trade deficit of $37bn may occur this year.

In the first half, with goods imports of around $29bn, the half-yearly trade deficit is already at $18bn. And analysts say that imposition of regulatory duties and other similar measures to check imports growth may make very little difference because of strong demand and importers ability to get around restrictions by dealing with corrupt officials.

Demand for finished imported goods is growing only due to an increase in income levels. And increased industrial activity is necessitating imports of raw materials. The output of large-scale manufacturing (LSM) in the first four months of 2017-18 expanded by 9.64 per cent and 13 out of 15 categories of LSM, with a combined weight of 95pc in the index, recorded a rise in production.

These included such heavyweights as textiles, food and beverages, iron and steel and automobiles. Foreign direct investment (FD) in these and other industrial sectors is also providing an impetus to productivity.

In the first half of FY18, though inflows of FDI slipped to $1.721bn from around $1.765bn a year ago, “the general mood remains upbeat,” officials claim, pinning hopes on China. FDI from China shot up to around $1bn in July-December against $414m a year ago as progress on CPEC projects gathered pace.

“During the second half of FY18, too, FDI of no less than a billion dollars will come in from China alone,” said a source in the Board of Investment, adding that FDI from France, Germany, Italy, Japan, South Korea, Malaysia, UAE, Turkey, Saudi Arabia, UK and USA is also in the pipeline for the rest of FY18.

Home remittances in the first half of FY18 grew 2.5pc year-on-year to about $9.745bn. But a matter of concern is a straight 7.5pc decline in expatriates’ money coming from Saudi Arabia, our biggest remittances market.

A big decline in export of Pakistani workers (down to 496,287 in 2017 from 839,353 in 2016) does not auger well for growth in home remittances, let alone changes in overall dynamics of labour export market.

That is why Pakistan is now seeking a higher quota for its workers in Saudi Arabia and the SBP is tightening rules for forex companies to ensure that overseas Pakistanis send their money back home through official channels.

Cotton production

Cotton output during the current season has gone up 7.6pc year-on-year to 11.33m bales (up to Jan 15). Still, meeting the target of 12.6m bales seems difficult.

Officials of provincial agriculture departments say the total output may reach close to 12m bales at best.

As textile exports have started growing, a lower-than-targeted cotton output would only increase the need for imports. Since the country is already facing a big trade deficit, ensuring enough cotton production at home has become all the more important.

Khalid Abdullah, Cotton Comm­issioner of the Ministry of Textiles, recently told the APP news agency that the Pakistan Central Cotton Committee was being streamlined in an effort to see what could be done to boost the country’s cotton yield.

He said a sub-committee set up for this purpose would meet sometimes this week. A local daily, quoting official sources, reported that during the next budget the government may set aside Rs10bn for a 10-year massive cotton research programme to ensure sustainable increase in cotton output and yield.

Published in Dawn, The Business and Finance Weekly, January 22nd,2018