PAKISTAN’S current account woes are going from bad to worse, with the country posting a record high monthly deficit of $2.55bn in January. The deficit has expanded mainly due to soaring imports, falling workers’ remittances and surging debt payments. State Bank data shows that the trade deficit rose 9pc while remittances dropped 15pc month-over-month. Debt payments more than doubled in the second quarter of the present fiscal to $4.07bn from $1.66bn a year ago, according to a report. However, the bank doesn’t look too worried about the widening current account gap. The January deficit surged owing to “imports in kind — like Covid vaccines — that are fully financed”, the bank tweeted. Excluding imports in kind, it added, the deficit should have been around $1.6bn, much lower than $1.93bn for December. The bank estimates the current account deficit to stay at 4pc relative to GDP for the fiscal year. Financial analysts say the ratio could widen to 4.25pc. So does this mean that all is well with the external sector? No. Medium- to long-term risks to external-sector stability remain. For one, oil price volatility, which is rising due to the Russian invasion of Ukraine, continues to pose a major threat to Pakistan’s fragile capacity to pay its bills and debts. The share of petroleum products in the import bill during the first seven months of the ongoing fiscal was 25pc. This is likely to soar if global prices remain elevated over the next several months or even weeks.

Running a current account deficit should not be a cause for worry per se so long as foreign capital flows into the economy are brisk enough to finance imports. The trouble is that foreign inflows have been drying up fast, with exports and FDI unable to match the rapid increase in the import bill owing to soaring global commodity markets. The trade deficit in goods and services increased to $27.35bn during the first seven months of the current fiscal against $14.81bn in the same period last year. Consequently, the government has to borrow left, right and centre to finance its import bill and debt payments despite a significant growth in home remittances in the last three years. Growing pressure on the foreign exchange reserves of late compelled it to accept harsh IMF conditions for the resumption of the stalled funding programme and raise interest rates to protect the home currency. Further weaknesses in the current account could force the bank to boost rates again, which may adversely affect economic activities.

Each time the external account comes under pressure, the authorities introduce piecemeal emergency measures, such as restrictions on imports. These actions may be work temporarily but are not a durable solution to the problem. Unless structural reforms are implemented to boost exports and woo FDI, we will periodically continue to face long periods of bust after every brief boom in the economy.

Published in Dawn, February 26th, 2022