In five months of this fiscal year (July-November 2023), Pakistan’s total trade deficit — including the deficit in merchandise and services trade —fell to $9.89 billion from $13.74bn in the same period last year.

This massive saving of $3.85bn was crucial in lowering the current account deficit to $1.16bn from $3.26bn even though remittances didn’t help. Remittances in July-Nov 2023 rather came down to $11.05bn from $12.32bn in July-Nov 2022.

Small wonder that the rupee is relatively stable these days. But can the falling trend in the current account deficit be sustained in future? To make any projections about it, one must first look at how the overall trade deficit shrank so much in five months of the current fiscal year and then make smart guesses about how those underlying factors might behave in the coming months.

The overall trade deficit fell in five months not because Pakistan’s merchandise or services exports skyrocketed. It did decline primarily because merchandise imports plunged — from $25.34bn in July-Nov 2022 to $21.28bn in July-Nov 2023.

The decline in merchandise imports was so large that it concealed two otherwise very disturbing facts: First, imports of services in July-Nov 2023 shot up to $4.11bn from $3.41bn in July-Nov 2022 and second, even exports of services slipped to $2.99bn from $3.09bn, according to the State Bank of Pakistan (SBP).

The current account deficit cannot be stopped from rising in the second half of the current fiscal year

Now, to be optimistic about the rupee’s future gains and stability, one must be optimistic enough to believe that (1) merchandise imports will continue to fall speedily, (2) both exports of goods and services will rise dramatically, and (3) services’ imports will somehow start falling.

Not only that, those hoping for the rupee’s upward march must also be optimistic enough to believe that remittances would restart growing rapidly. Sadly, ground realities indicate otherwise.

Merchandise imports will not only stop falling; they are expected to grow in the coming months as the SBP has been under immense pressure from the International Monetary Fund and local businesses to liberalise imports further. The caretaker government’s efforts and the newly elected government’s efforts to revive the industry will also naturally increase the merchandise imports bill.

Although cumulative growth of large-scale manufacturing during July-Oct 2023 over July-Oct 2022 remained negative 0.44pc, almost all key industries’ output has started growing. The list of industries whose output went up in July-Oct 2023 includes food, beverages, wearing apparel, leather products, coke and petroleum products, chemicals, fertilisers, pharmaceuticals, rubber products, non-metallic mineral products, fabricated metals and machinery and equipment etc.

If this trend is sustained — and the caretaker government, as well as the incoming elected government after the 8th Feb 2024 elections, have no other option but to ensure sustaining it — the pressure on imports should not be hard to imagine.

However, exports of goods will take time before showing any significant growth simply because high electricity and gas prices, higher incidence of taxes, high-interest rates and still-elevated levels of inflation may continue to act as big impediments.

The establishment of Exim Bank’s two powerful export advisory councils— one for textiles and another for non-textile items — is a laudable measure. But their mere creation cannot boost exports in the short term. In the medium term, though, they can be expected to contribute to export growth significantly.

Those hoping for the rupee’s upward march must also be optimistic enough to believe that remittances will restart growing rapidly

Similarly, policies recently introduced to improve the working environment for exporters of services (particularly IT exporters) and streamlining services export proceeds’ inflows are equally praiseworthy. But they, too, cannot open the floodgates of forex earnings in the short term, particularly in the absence of a proper services’ exports ecosystem, quality education and training institutions and required global marketing.

Besides, services imports cannot be contained as easily as imports of goods. In fact, imports of services, particularly imports of IT and telecom services, are more essential for boosting IT and IT-enabled service exports than imported raw materials are for boosting goods’ exports. The reason is finding local substitutes for tangible imported raw materials is a lot easier (of course, after compromising on quality) than finding substitutes for imported non-tangible items like IT and IT-enabled services.

Additionally, services imports are also sure to grow as Pakistan accelerates efforts to increase its overall economic growth. This means there’s no scope for containing forex spending on services imports in the foreseeable future.

What does all this mean for the current account balance? It means that the current account deficit cannot be stopped from rising in the second half of the current fiscal year, and with that, the pressure on the exchange rate can also not be avoided effectively.

Remittances have rescued Pakistan in the past on several occasions. And this time, too, the caretaker government seems to have realised that. Both top political and military leadership are doing their best to encourage overseas Pakistanis to send more and more foreign exchange back home.

However, desirable growth in remittances cannot be achieved just through the right set of policies at home or even constant pampering of overseas Pakistanis by the country’s leadership.

Economic conditions of the host countries of the Pakistani diaspora, competition in labour markets there, availability of investment opportunities in the host countries and, above all, the perceived political environment back home in Pakistan matter a lot.

That said, it seems that the elected government that comes into power after the February 2024 elections will have no other choice but to restart external borrowing in a big way.

Published in Dawn, The Business and Finance Weekly, December 25th, 2023