It is clear that the country is heading towards a serious balance of payments crisis. According to the latest data released by the State Bank on 20th November, 2017, Pakistan's current account (C/A) deficit has posted a huge deficit of dollar 5.013 billion in July-October, 2017 compared to dollar 2.259 billion in the same period last year, depicting a sharp increase of 122 percent or dollar 2.754 billion. The main culprit was a large deficit in the merchandise account. With dollar 17.395 billion of imports and dollar 7.656 billion of exports, the country's trade deficit surged to dollar 9.739 billion in the first four months of the current fiscal year as compared to dollar 6.989 billion in the corresponding period of last year. Services' deficit stood at dollar 1.6 billion, with dollar 3.23 billion of imports and dollar 1.66 billion of exports. Deficit of income sector also witnessed some growth. With dollar 1.639 billion of payments and dollar 214 million of receipts, the deficit of income sector surged to dollar 1.43 billion in July-October of FY18. Although home remittances and DFI have recorded some modest growth during the year so far but the increase in these components has not been significant to neutralise the negative impact of other elements of current account balance.

Continued deterioration in the C/A balance is of course a very disturbing development. If the present trend continues, this deficit could reach over dollar 15 billion or about 5 percent of GDP as compared to dollar 12 billion in the previous year. This could have severe implications for the level of foreign exchange reserves, value of the rupee, investor confidence, inflation, monetary policy, etc. Financing flows are also hard to come by and the C/A deficit is being bridged mainly by drawdown of country's foreign exchange reserves which have witnessed a steep fall of dollar 5.2 billion since October, 2016. The government is planning to issue $ 2 billion to $ 3 billion Sukuk and Eurobonds to partially finance the widening gap but such an action has probably been held in abeyance due to protracted absence of the Finance Minister from the country. However, it may be mentioned that external borrowings, in whatever form, would certainly be costly in our case and in no way can these be a substitute to addressing the structural problems in the external sector. The government has, of late, taken several measures to expand exports and curb imports to contain the C/A deficit. Prime Minister's package to increase exports has been activated a bit and regulatory duties on a number of non-essential imports have been imposed to curb the rising trend in imports. However, these measures are not enough to reverse the deteriorating situation in the external sector. The situation could only be improved if productivity of the economy is enhanced, quantity and quality of the exportable surpluses is improved and Pakistani products could be made more competitive in the international market by depreciating the rupee. Also, home remittances have to be increased to fill the widening gap in the external sector by revamping the PRI. At the present rate of exchange, expatriates would surely like to send their remittances through unofficial channels rather than banking channels. Keeping in view the seriousness of the situation, the government, in our view, needs to act fast and in a determined way to ensure a sustainable C/A position which is worsening by the day. In fact, the position needs to be improved to an extent that the country could be able to earn a surplus in the external sector in order to reduce the stock of outstanding external debt which has risen sharply during recent years.

Copyright Business Recorder, 2017