Curbing optimism

November 21, 2019

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FOR the first time in four years the external deficit of the country has recorded a surplus, though a nominal one and only in the month of October. There are grounds for cautious optimism here that at least one of the critical deficits in the economy is being bridged steadily and the course of direction is the correct one. But a closer look at the numbers shows that such optimism, cautious as it might be, should be restrained. Much of the improvement owes itself to increasing foreign currency inflows into Pakistan government debt mainly because of the high interest rates on offer here compared to regional countries. Secondly, a large one-off payment made by the telecom companies for licence renewal has suddenly spiked the foreign investment numbers. Third, a dip in oil imports has helped constrict the trade deficit more than anything else, while exports show only a marginal increase. It is hard to see how any of these factors can be reliably considered as a sustainable foundation on which to build the external sector’s strength.

What must be emphasised is that the current account deficit will reappear the moment the government guns for growth. At the moment, the slowing economy is the biggest reason for the slackening of the deficit, but once growth returns it is difficult to see how the deficit will be kept in check. Surely, the development itself — a current account surplus after years of sustained deficits — is an important milestone for the economic managers. But for the rest of us, it is merely a blip along a long road that must include sustainable reforms and improved competitiveness. Sadly on that front, there is no real progress to show. The recently announced national tariff policy claims to address some competitiveness concerns, particularly for exports, but whatever has been released of it thus far shows little more than antiquated thinking that belongs to the 1960s. Even the words ‘infant industries’ were mentioned in it, though one wonders what infant industries requiring tariff protections the authors of the policy may have in mind. For that we will have to wait for the full list of tariff protections that the policy aims to bring. In the meantime, all we have is a declining deficit that in part owes itself to luck, in part to a slowing economy, and in part to high interest rates.

Published in Dawn, November 21st, 2019