Current account deficit

Recently released data of the State Bank of Pakistan has revealed that the current account deficit (CAD) has contracted to a six-year low and foreign exchange reserves have also increased. Deficit is a measure of a country’s trade where the value of goods and service in imports exceeds the value of the products it exports. The current account of a country may include the net income of that country, such as interest and dividends, and may also count transfers such as foreign aid, though usually these components make only a small portion of the total current account. So, briefly, the current account represents a country’s foreign transactions and is a component of country’s balance of payment.

Now, according to the SBP data, the CAD has narrowed 73 percent to just $2.8 billion dollars in the nine months of the current fiscal year. But this piece of news is both good and bad. The good news is that it shows some stabilization resulting from the regulatory measures the SBP has taken over this past year. And these efforts have yielded some improvements during the first three quarters ending in March 2020. It also shows that foreign inflows and balance of trade showed an uptick. The shrinking of the CAD to just 1.3 percent of the GDP in nine months compared to 4.7 percent in the corresponding period in the previous year is a positive development. But it also entails bad news because there has been a decrease of over 16 percent in imports, while we have shown just 1.3 percent increase in exports during the period under discussion. A reduction in CAD can be a good development when it is achieved through a substantial increase in exports – which has not been the case ever since the present government assumed power in 2018.

The focus of the present economic managers has been to reduce the deficit not by improving exports but by reducing imports and that is not a good sign for any economy in the long run. It may give a temporary reason for jubilation to government circles but senior economists have been warning against this sustained decrease in imports. Declining imports also mean that there is a sluggish economy that is likely to result in a screeching halt of economic activities. This is even truer in an increasing likelihood of a prolonged Covid-19 pandemic that has already crippled the economy not only in Pakistan but the world over. The increase in foreign exchange reserves is also the result of reduced payments for imports and not thanks to an improved economic performance. In fact it is a time of concern for the country as the challenges the country is facing are mounting.