Developing countries go through periods of high current account deficit as they import technology and equipment to enhance their economic capacities and capabilities; current account deficit also widens if a country imports for consumption to compensate for domestic shortages.
BUDGET
Developing countries go through periods of high current account deficit as they import technology and equipment to enhance their economic capacities and capabilities; current account deficit also widens if a country imports for consumption to compensate for domestic shortages.
Current account deficit is a liability that country builds up against its trade partner countries. These liabilities are financed by flows in financial account. Like any other liability this burden has to be paid back. This is the reason that economists advise that funds borrowed from foreign sources should not be used liberally on avenues that do not guarantee long-term productive gains.
Such wastage of foreign funds erodes its ability to repay. If the practice continues for a longer period the country would be risking its solvency. Solvency of the country depends on ability to generate sufficient surpluses to repay the amount it borrowed in the past to finance its current account deficits.
Pakistan recorded a Current Account Deficit of $7,500 million during July-April period of this fiscal. That is the highest ever in the country’s history. Current Account in Pakistan averaged $-526.08 million from 1976 until 2017, reaching an all time high (surplus) of $1,418 million in the third quarter of 2002.
Pakistani planners should now analyse the way the foreign money was used. If Ishaq Dar is to be believed, all foreign funding this year was used on projects that have a capacity to payback after their completion. If this is true, then it is a good sign. Ground realities belie this claim.
It may be true that funds the government received for development from the donor agencies were utilised in better yielding development projects. But the general import trends in Pakistan reveal a pattern that foreign exchange was consumed without a chance of paying back these imports in future.
As a developing country, we must encourage all imports that generate manufacturing employment in our country. In view of our vulnerable foreign exchange, we should take measures that discourage purely consumptive imports meant for luxury. Import of luxury cars for instance should be totally banned. These high priced three-year-old used cars are two to three times more costly than the more expensive than non-luxury but highly comfortable Honda or Toyota models.
Similarly, import of processed milk, juices and processed chicken and other food items should be discouraged. There should be a very high ad-valorem duty on these items to ensure that these items are not under-invoiced. Food products are prone to go stale and have an expiry date.
There is no mechanism in Pakistan to check the purity and quality of most food items. There should be a complete ban on the import of processed foods until such capabilities are developed at the customs where these are cleared. Pakistan has highly developed processed food industry and some globally respected international and domestic brands that are manufacturing top quality processed food.
According to International Monitory Fund (IMF) if the deficit reflects an excess of imports over exports, it may be indicative of competitiveness problems, but because the current account deficit also implies an excess of investment over savings, it could equally be pointing to a highly productive, growing economy.
If the deficit reflects low savings rather than high investment, it could be caused by reckless fiscal policy or a consumption binge. Or it could reflect perfectly sensible inter temporal trade, perhaps because of a temporary shock or shifting demographics.
The current account can be expressed as the difference between the value of exports of goods and services and the value of imports of goods and services. A deficit then means that the country is importing more goods and services than it is exporting—although the current account also includes net income (such as interest and dividends) and transfers from abroad (such as foreign aid), which are usually a small fraction of the total.
The government estimates that the current account deficit would further widen in 2017-18 because of acceleration of China-Pakistan Economic Corridor (CPEC) related development expenses. Financing development projects through foreign funding should not be an issue if the projects are completed on time. The cost overruns in case of delays are very high and because of delays the repayments start maturing before the nation could reap the benefits of that project. In that case, the government has to bear the debt servicing from its own resources.
There is nothing innovative in the last budget of this government presented by Ishaq Dar. He will now have to ensure that the government remains within its limits during the election year. We may recall that the things were as rosy as they look today when the Shaukat Aziz-led government presented its last budget. The inflation was in single digit, rupee was stable, foreign exchange reserves were at comfortable level, the current account deficit was in manageable range, the circular debt was not a problem and the exports were on rise.
A few months later, things started deteriorating as the government went into public appeasing mode. Inflation started rising, foreign reserves started declining, circular debt surfaced as a major issue, and exports stagnated. Foreign Direct Investment nosedived. Had that government continued with the policies that delivered in past four years, the economy would have been in excellent shape.
Present regime has also achieved a lot in past four years, though the performance still does not match that of Shauket Aziz era as exports are declining and circular debt is a major issue. The reforms it introduced in the past are strengthening the economy though the thrust of reforms has only been on maintaining macroeconomic stability. This government has failed to remove flaws in power sector management and has miserably failed on export front. Under these circumstances any move to relax the reforms for public appeasing would be more injurious for the economy than in 2008. The public sector companies are now a real problem for the economy. All efforts to restructure them in last four years have failed. There is a dire need to get rid of them immediately. The circular debt because of inefficiencies and incompetence of power distribution companies and the ever increasing losses of other public sector entities are the major contributors in the budget deficit.
If the public appeasing measures do not go out of hand, it may help this government to win the next elections, but if the economy derailed as a consequence of these measures, this regime may lose the election.
In that case, we would be back to square one. Unlike developed economies where economic planners sitting in opposition are fully abreast with the current development in economy; we lack such informed economic mangers in opposition.
They would take time to analyse the deteriorating situation which may go out of hand. So it is in supreme national interest that the present government manage the economy in its last year with extreme caution and care so that anyone who comes to power in 2018 does not have to face the same problems that the preceding two elected government faced after assuming power.
Let us hope that this time around, Dar would be able to achieve all the targets set in the budget for 2017-18 including that of exports and tax revenue. Pakistan is at a crossroad where the government policies in next five years would determine whether it becomes a trade corridor only or a manufacturing hub for the entire region.
The writer is a staff member
