KARACHI: The current account deficit emerged as the biggest threat to the external sector as it jumped over 200 per cent in the first 10 months of 2016-17.
The State Bank of Pakistan (SBP) reported on Wednesday the current account deficit for July-April rose to $7.24 billion. The record increase is indicative of a crisis brewing on the external front.
The deficit can widen up to $9bn by the end of the fiscal year as a growing trade deficit sets a new record every month.
The current account deficit in April was also record high. It rose to $1.13bn against the deficit of $546 million in March. The trend can wreak havoc on the economy. Policymakers are borrowing from the international market to maintain foreign exchange reserves in order to ensure exchange rate stability.
As the export performance remains poor, policymakers are unable to control the slide in foreign exchange reserves. It looks like their only solution is to borrow more from the international market and global financial institutions like the IMF.
The trade deficit of about $26bn during the 10 months left the government with no argument except that 40pc of the imports consisted of machinery that would ultimately boost exports. Experts likened the government’s argument to a face-saving gesture.
The government set aside a Rs100bn fund to boost exports, but exporters could not fully avail the facility. The fiscal gap has also increased due to a shortfall in the revenue collection.
According to the SBP, the import bill for the 10-month period rose to $44.87bn compared to the exports of $22.62bn. The SBP has so far succeeded in maintaining the exchange rate in the interbank market while a better supply in the open market kept the rupee-dollar parity stable.
Declining remittances pose another threat to the external sector. The decline of 2.7pc in remittances during the 10 months does not appear to be too big. But the fall in inflows is an indicator of the beginning of bad days for Pakistan that depends largely on remittances to meet the current account deficit.
The growing current account deficit cannot be met by remittances alone as they amounted to only $15.6bn in July-April.