Daily Times

Current Account Deficit (CAD) is that biggest challenge what Financial Managers of present government to deal with utmost care together with debt servicing which is another huge problem. Pakistan is also witnessing Trade Deficit from last many years which need to be controlled in a way that it may not result a slowdown in business activities. PTI has no other option but to tackle these twin deficits under tough conditions imposed by International Monetary Fund (IMF) and in the times where the government is dealing with huge debt servicing. As we see, PTI is trying to bring down CAD and Trade Deficit by number of means including but not limited to devaluation of currency yet it is bringing inflation and economic slowdown. Figures show that under PTI regime Pakistan has paid off the biggest amount related to debt servicing ever in the history of this country. However, speed of taking further loans is also very fast due to the fact that despite of all measures neither import is considerably going down nor Exports are increasing in line with the magnitude of Pak rupee devaluation. Now in a scenario when devaluation is happening, Government is borrowing from Private Banks so that reliance on Central Bank may be avoided and inflation is on the peak touching double digits, interest rate hike become due which will further act as a catalyst to trigger economic slowdown. There is a way to deal with this economic condition where economy seems trapped and that is to change consumer preferences towards import substitution together with looking other horizons and products for exports.

After IMF conditions energy cost will increase and this will affect economic activity. To deal with this situation renewable energy source will be the only option which requires government attention

Federal Board of Revenue has released some important data recently related to Balance of Payment and Fiscal Accounts. According to this data CAD for the month of April 2019 increased to $ 1.2 Billion, higher by 42.5% on a sequential basis whereas Trade Deficit remained flat for the same time period. However if a Year on Year (YoY) period may be selected than it will show that the twin deficit has went down however still unacceptably high if devaluation may be considered. CAD declined by 27 % YoY which means averaged to $1 Billion per month that should be near to $ 5 Billion per annum. The import bill stood at $4.2 billion in April, up by 1 percent on monthly basis, but down by 15 percent on yearly basis. In coming months, imports would be under pressure as energy consumption usually peaks in summer. Exports are not moving up, in 10MFY19, the exports are down by 2 percent. This means that currency adjustment is not working in favour of controlling trade account which needs to be further checked. Fiscal deficit for last 9 months stood at Rs.1,922 Billion as compared to Rs.1,481 Billion for same period last year, reflecting a 30% corrosion of the fiscal account. External loans swelled to 5% of GDP during the period as compared to 4.3% in the similar period last year. The government domestic financing increased in this period to 73% of total debt as compared to 65% of last year for same period whereas borrowing from SBP remained alarmingly high i.e. increased from Rs.1.3 Trillion to Rs. 4.9 Trillion.

Above figures show that there is a gap between measures taken by the government to control twin deficits with that of other indicators of the economy. It is evident from these figures that massive devaluation somehow curtailed imports but not to a level which was expected whereas export side is not responding at all. On the other hand this devaluation has brought inflation which resulted in interest rate hike that will result in further economic slowdown and unemployment to rise. The new government has successfully implanted right economic measures to control present situation but there are certain parameters which need to be addressed and by addressing these Pakistan can deal with this economic emergency. Import substitution is one of these parameters which can control foreign exchange outflow that otherwise is happening from import based consumption pattern in Pakistan. There are two sides of import based consumption. One is imported items to be consumed by locals with no value addition like imported cars, cosmetics etc whereas the second one works as a raw material which after a little value addition become available to general public like home appliances, assembly lines etc. There are certain multi national companies (MNCs) who import raw material which otherwise is available in Pakistan and becoming source of foreign exchange outflows. To deal with this situation government need to promote made in Pakistan consumer pattern. Quality control of local products and raw material is the only way to shift consumer preference towards local goods. Lack of quality is that impediment which discourages consumer end to use local product and compelled them to import the same with having better quality despite of the fact that it is going to be expensive. Tackling this issue will bring the local small players back to business which otherwise were vanished due to cheaper imports.

On Export side, devaluation criterion has not worked which means that other factors need to be addressed. First of all import for export purposes may be allowed with certain relaxation of duty structure but these imported goods should not be comprised of products which otherwise available in Pakistan. For example Textile industry which contributes more than 57% of total export volumes requires cotton as a major raw material. Most of the time the industry imports cotton due to the fact that either it is not available in Pakistan as crop target doesn’t meet or yield is not impressive. If government controls cotton production not only import bill may be reduced to such extent but it will also reduce the input cost for the industry. After IMF conditions energy cost will increase and this will affect economic activity. To deal with this situation renewable energy source will be the only option which requires government attention. Apart from coal, there are certain sources which doesn’t have input cost related to raw material such as wind, solar and water. Dams in this regard are more appropriate which also become source of water reservoir that is needed for bringing up the agriculture output. Above all Pakistan embassies working in different parts of the world should be given targets to sell and promote made in Pakistan products so that a collective effort from business people and government servants with shared sense of responsibility may lead to explore more horizons for Pakistani products.

The writer is an Economist, Corporate Finance Specialist and a Chartered Banker UK