Current account surplus

While most of the economic indicators like the growth rate, budget deficit and inflation are showing negative trends, news on the external sector continues to be encouraging. According to the latest data released by the State Bank on 18th April, the country’s current account balance has become positive, registering a surplus of $99 million during the first nine months of the current fiscal year (July-March, 2011) as compared to the deficit of $3.1 billion in the corresponding period of FY10.The surplus was driven primarily by high inflows of home remittances and a substantial increase in exports. An aggregate deficit of trade, services and income accounts stood at $11.41 billion during July-March, 2011, while surplus in the current account transfers, representing mainly workers remittances, amounted to $11.56 billion. The country’s trade deficit, with $25.95 billion of imports and $17.95 billion of exports, stood at $8.01 billion as compared to $8.2 billion in the corresponding period of last year.

The services sector deficit declined sharply by 36 percent to $1.23 billion from $1.93 billion in July-March, 2010. Income sector outflows stood at $2.6 billion, while inflows were recorded at only $499 million. Another positive was an almost consistent improvement in the current account in the latest months, with a surplus of dollar 347 million registered in March, 2011. This suggests that Pakistan’s performance in the external sector may be even better than the State Bank’s latest projection of the current account deficit of 1.0-1.5 percent of GDP during FY11.A positive turnaround in the current account of the country is indeed a very welcome development, especially considering the fact that the C/A balance has been mostly in deficit in the history of the country, forcing the authorities to borrow from outside sources, year after year and adding to the external debt burden that has to be repaid in foreign currencies with interest.With a solid improvement in the current account, the country would have less compulsion to borrow from abroad, although it is obvious that foreign exchange reserves could dwindle with payment of short-term liabilities and the country may be obliged again to seek another programme with the Fund.

In any case, it is apparent that a healthy improvement in the current account during the current year has not only obviated the risk of default in the near future, but also stabilised the exchange rate of the rupee and helped the country to maintain foreign exchange reserves at a comfortable level. Also, if the country is able to maintain a strict fiscal discipline in the next couple of years, a comfortable current account position could help a great deal in reviving economic growth to respectable levels, which could resolve many of the endemic problems of the country.However, most of the analysts are of the view that transitory factors have largely contributed to the recent improvement in the current account. For instance, exports have risen due to an unusual increase in the international prices of our products, and home remittances have jumped due to instability in the Middle East and such factors cannot be relied upon to boost the prospects of external sector for an indefinite period.

On the other hand, foreign investment, which could sustain an improvement in the external sector and also increase the growth rate and exportable surpluses, has tended to decline due to political instability, acute energy shortage and persistent deterioration in the law and order situation. Also, there are enough indications that oil prices in the international market may continue to rise and this will have serious implications for our balance of payments.All of this calls for in-depth analysis of the situation with a view to undertaking policies to sustain the current improvement in the external sector of the country on a longer-term basis. In particular, there is a need to be extra-cautious and avoid complacency, in order to prepare ourselves for contingencies, which may be beyond our control. – Brecorder