Is a surplus or low current account deficit in a developing country like Pakistan a sign of economic prudence? The current account balance is identically equal to saving - investment gap. A surplus in current account means saving exceeding investment or a low current account deficit means saving is marginally less than investment. A surplus or low deficit may not always be a sign of economic strength. It could mean that a country's residents find it more profitable to invest abroad. If this is due to a lack of investment opportunities at home, the country may be forfeiting domestic growth. The current state of Pakistan's economy, as will be seen momentarily, represents this fact.
A country having surplus in current account means that it is a net exporter of capital. In a plain language, the country is an aid giver rather than an aid recipient. A cursory look at Pakistan's balance of payment is sufficient to see that it has experienced an average current account deficit of only 1.0% of GDP over the last five years (2010/11 - 2014/15). The deficit is reduced to 0.5% of GDP in the first four months of the current fiscal year.
Since current account balance is identically equal to the gap between saving and investment, both saving and investment rates have averaged almost 14% and 15% of GDP, respectively over the last five years. It is well-known that Pakistan's saving rate is not only low and stagnant but it is also lower than its South Asian neighbours. Thus, a surplus or low current account deficit, by definition, suggests that Pakistan's investment rate is also low and hence economic growth is not only low but it is stagnant as well.
It is well known that developing countries like Pakistan carry a baggage of higher unemployment and poverty. It is their compulsion that their economies should grow at a faster pace. Developing countries' economies are largely dependent on imported raw materials, machinery, capital goods, and energy. A slower growth in import demand reflects slower economic growth and a negative growth in import demand represents a worsening of economic activity in the country.
If a country wants to achieve a surplus in current account, it can do so by drastically cutting down its import. Is it good for the economy? Is it good for the job creation? Pakistan is experiencing surplus or low current account deficit because its economic activity has slowed considerably over the last five years. Import growth is either flat or has turned negative because private sector is shy and not borrowing enough from commercial banks to expand their businesses. This phenomenon is reflected in the growth of large-scale manufacturing which is hovering in the range of 3-4 percent despite every effort of the Pakistan Bureau of Statistics to jack up its growth through idiosyncratic numbers.
A surplus or low current account deficit in the last two and a half years means that investment has either fallen below or slightly above the already low saving rate. This is a dangerous sign for the country's medium-term growth prospects. Credit to private sector as a percentage of GDP in Pakistan is not only the lowest in the region but it has been facing a steep decline. Credit to private sector continued to rise from 18 percent of GDP in 2002-03 to 27 percent by 2007-08. Since then, it is on the downward trajectory - declining to as low as 13 percent of GDP in 2014-15. Hence, private sector investment is on the decline and public sector investment is also down for budgetary reasons. Hence overall investment has declined substantially (over 10 percentage point of GDP) in the last eight years. Low level of investment has not only led to a slower growth in GDP but also kept current account deficit low or even in surplus during the period.
It may be pointed out that investment depends on an enabling environment. In the midst of shortage of power, gas and other infrastructural bottlenecks on the one hand and rising political tension, poor law and order situation, and the absence of engagement between private sector and the country's political leadership on the other, it is hard to imagine that private sector would come forward and take advantage of low interest rate environment. This environment may encourage activities in the stock market, hoarding of commodities and speculative activities in real estate.
Why the current account balance has either remained in surplus or in a low deficit range in recent years? The readers would recall that Pakistan has been under the IMF Programme for most of the period during the last eight years. The key element of the IMF Programme has been the reduction in domestic demand through tight fiscal and tight monetary policies.
The reduction in demand has been instituted through austerity measures since 2008/09. Such policies do not just impose short-term losses of jobs and output but they also crippled the country's long-term growth prospects. The policies that depress the economy in the short run also inflict lasting damage on long-run growth of the country. Recent empirical evidence suggests that downgrading of a country's long-run growth prospects is strongly correlated with the level of austerity measures that the country has undertaken. The pursuance of IMF dictated stabilisation policy or austerity programme has severely damaged the country's both short- and long-term growth prospects. It has suffocated the economy and as such the austerity measures have become self-defeating even in purely fiscal terms. Government that slashed spending in the face of depressed level of economic activity hurts its own economy and hence its future tax receipts so much that even its debt will end up higher than it would have been without the cuts in spending.
Thus, the IMF programme has slowed the economic activities in Pakistan and as such has also slowed import demand, resulting in surplus or very low deficit in current account. It has inflicted lasting damage to country's long-run growth prospects with serious consequences for job creation. Pakistan needs to shift its fiscal policy stance from austerity to growth enhancing.
(The writer is Principal & Dean at NUST School of Social Sciences & Humanities, Islamabad)