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This is apropos a Business Recorder editorial titled "Grappling with widening trade deficit" published on October 29, which has referred to recent steps of the government to arrest rising imbalance in trade and expressed apprehension whether or not they would be enough to meet the desired results.

It is worth pointing out that in past current account deficit had soared to higher levels than it is at present; one such instance is of 2007-08 when the deficit was recorded at $13.87 billion equivalent to 8.2% of GDP. Pakistan's current account deficit in FY 2013 was US$ 2.5 billion, which increased to US$ 3.1 billion in FY 2014; but improved to US$ 2.8 billion in FY 2015. However, in the following years, current account deficit did not maintain the pattern and increased to US$ 4.9 billion in 2016, and reached US$ 12.4 billion during FY17. This widening of current account deficit has been accompanied with a decade high level of real GDP growth of 5.3 percent in 2016-17, as compared to 4.5 percent in 2015-16.

Widening of current account deficit is attributed to increase in imports as well as stagnancy in exports and remittances. On the import side, acceleration in economic activity along with fast pace investments in infrastructure and energy related CPEC projects, have created demand for machinery, petroleum products and other productive imports. Though trade account has taken the toll of these increased imports yet Pakistan is expected to benefit from robust growth associated with these energy and infrastructure investments, as also indicated by recently released Standard & Poor's report.

In order to revive industry and promote investment in the country present Government had reduced SBP policy rates like mark-up rate of Export Refinance Facility, (from 9.5 percent in June 2013 to 3 percent in July 2016) and mark-up rate on Long Term Finance Facility (from 11.4 percent in June 2013 to 6 percent in July 2016). These measures have now started showing results as is evident in the figures of Q1 of CFY. For example, large scale manufacturing has recorded a growth of 11.3 percent in July-August 2017 as compared to 2.1 percent in the corresponding period of LFY; during FY17 a growth of 5.7 percent was recorded against 3.1 percent in FY 16. Similarly, textile sector export has recorded a growth of 8 percent in Q1 of FY18 against the nominal growth of 0.04 percent in FY 2016-17.

While on export and remittances side, sluggishness in economic activity at global level has contributed to worsening current account deficit. Subdued international commodity prices and contraction in global trade volumes in recent past has negatively impacted the country's export growth. Similarly, slowdown in remittances is mainly driven by weak economic conditions in the Gulf region, which account for more than 60 percent of total remittances of the country. It is pertinent to mention that slowdown in foreign remittances was not Pakistan specific rather a global phenomenon.

For FY18, current account deficit is expected to be around 4.3% of GDP or about US$ 14.8 billion and not US$ 16.5 billion as quoted in the editorial; similarly, debt servicing requirements for the CFY are around US$ 5.8 billion and not US$ 7.5 billion as indicated in the news item. Going forward, the government has taken multiple measures to address imbalances in the current account. Though these measures have started showing results yet it is too early to assess its full impact.

Data for Q1 of CFY indicates that the negative trend in exports has bottomed out and Government initiatives have shown positive results as exports have increased by 12.4% as compared to negative 5 % in corresponding period of last year; similarly, workers' remittances have also increased by 1.05% during Q1 of FY18 as against corresponding period of last year. Similarly, FDI during July-September, FY18 stood at US$ 663 million as compared to the figure of US$ 423 million in the corresponding period of last year. With these positive trends strengthening, in coming months, the current account deficit is likely to improve substantially. It is expected that the external imbalances are temporary and will reverse in next two years. With peaking out of CPEC related investments and benefits from the robust growth generated by investments in energy and infrastructure sectors of the economy will abate the current situation.

Additionally, S&P Global Ratings, has recently affirmed Pakistan's Short-term and Long-term ratings as 'B' with stable outlook for long run, which reflects that economic prospects remain favourable and external and fiscal metrics of the country are not likely to deteriorate from their current level. S&P report acknowledges that current account deficit was caused by robust domestic demand and implementation of energy and infrastructure related projects under CPEC. This affirmation is not only a manifestation of the sound economic policies of the Government but also an indication of better economic prospects, higher investments and inclusive GDP growth in coming years. Government of Pakistan is cognizant of challenges and is taking necessary measures to address these challenges. The initial trends in terms of imports, exports, FDI and industrial sector growth are positive. Government is expecting that the measures it has taken will strengthen the positive impacts further in due time.



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