THE continuous declines being seen in the external-sector deficit of the country are perhaps a reason to believe that the economy is finding its equilibrium after years of ballooning deficits that have depleted the foreign currency reserves. The latest data released for the month of July shows an accelerating pace of contraction in the current account deficit, indicating that a trend that began earlier this year is finally gathering pace. The decline is sharp compared to the corresponding month last year. July this year saw a current account deficit of $579m whereas it was $2.13bn in July last year. This is a sharp and appreciable drop, and coming on the back of continuous declines since earlier this year, shows that the economy is indeed turning the corner after the unsustainable deficits it was saddled with when the PTI government began its term in office.

But there are grounds to be cautious about celebrating this outcome. For one, the State Bank’s latest quarterly report, which covers the period July to March of the previous fiscal year, notes an accelerating contraction of the current account deficit but attributes much of it to a decline in oil prices, contraction in imports of LNG, and tapering off of machinery imports as CPEC projects come to an end of their construction phase and begin commercial operations. A small part of the overall contraction in the third quarter of the last fiscal year was attributed to government policies, and even that part was possible mainly because the stabilisation policies adopted by the government caused a sharp and severe slowdown in the pace of economic activity. In short, contingent factors and collapsing demand explain the declining current account deficit until March, developments that are hardly worthy of celebration. And in that report, the State Bank was also careful to point out that despite the contractions, the current account deficit remains elevated, meaning further contraction will be necessary. We will have a clearer picture of what to make of the continuing declines in the deficit since March when the State Bank releases its next analysis for the period April to June. In the meantime, it is enough to say that the government’s policies have played a role in helping rein in a runaway external deficit, but this role has been helped in large part by global factors, a little luck, and significant strangulation of the economy.

Published in Dawn, August 22nd, 2019