Stringent steps planned to avert looming BoP crisis

ISLAMABAD: The government plans to adopt more vigorous fiscal and monetary measures and also higher trade barriers on luxury imports to help tackle a looming balance of payment (BoP) crisis after the trade gap in the first two months of FY2021-22 touched a record high, officials said on Monday.

Officials said the commerce ministry has been tasked to come up with projections on trade balance after which the level of the monetary and fiscal tightening would be decided. The State Bank of Pakistan (SBP) may hike policy rate in the next meeting, while the finance ministry considers imposition of regulatory duty on non-essential luxury items.

So far the SBP had used exchange rate anchor to make imports expensive but this intervention had failed to deliver the desired results. So monetary tightening is on cards if imports continue to increase rapidly in the coming months, they added.

Top official confirmed to The News in background discussions after holding a high-level meeting on Monday that red flags were raised when the meeting was informed the external account was heading towards the same situation it had back in 2017-18.

However, they added that this time around current account deficit was not an ‘unattended issue’ like it had been in the past as now the government had decided to hold monthly meetings to monitor the situation for taking corrective measures.

“The external account especially the current account deficit may surge to $12 to $13 billion if the situation remained unattended” the official warned during the meeting. The SBP had projected that CAD would hover around $6 to $9 billion equivalent to 2-3 percent of GDP during the current fiscal year.

Ministry of Commerce high-ups told the meeting that Covid-19 related import of vaccine, raw material and machinery, as well as commodities’ imports were causing pressures on import bill.

It was assessed that the oil and commodities’ prices would start easing out in the second half of the current fiscal year. The POL prices had tumbled by $11 per barrel in international market.

The trade deficit had witnessed an unprecedented surge in the first two months of the current fiscal year as it touched $7.4 billion. The meeting also learnt that the upcoming spectrum auction of two blocks of 1800MHz and 2100 MHz was expected to fetch $800 million to $1 billion in the current fiscal year.

According to an official statement, finance minister Shaukat Tarin chaired the meeting to review the trade balance situation. Omar Ayub Khan, minister for Economic Affairs, Dr Reza Baqir, governor SBP and senior officials of commerce and finance ministries participated in the meeting. Abdul Razak Dawood, PM adviser on commerce participated through a video link.

Tarin said the economy is in a state of growth. "As economy registered a growth rate of 4 percent during FY2021, there is an increased demand for imports”. As long as the trade deficit was within a sustainable level, it would stimulate economic recovery," he added.

The finance minister stressed upon the ministry of commerce to conduct sensitivity analysis and build scenarios for effective forecasting both in imports as well as exports for each month of the year.

“The economy is heading in the right direction. The enhanced revenue collection along with improved ratings indicate that economy has gained momentum and is geared towards an inclusive and sustainable economic growth,” Tarin said.