Our escalating deficit

Pakistan’s economy is at a very critical stage; it has a current account deficit of $18 billion in fiscal year 2018

Pakistan’s economy is at a very critical stage; its continually growing imports and almost stagnant inflows have led the country to record a historic high current account deficit of $18 billion in fiscal year 2018. This is an alarming development, as the figures have surpassed forecasts made by both the International Monetary Fund (IMF) and the Ministry of Finance. The deficit is close to double the set target of $9 billion (2.9% of GDP) for FY18. Surprisingly, it is also much higher than the one estimated at around $16 billion by independent economists many months ago.

Even though the rupee has seen considerable depreciation four times since December, losing a cumulative 22%, this has failed to offset the negative impact. The mounting deficit has pushed the country towards a situation where it may default on its payments.

This situation is not new to the country, as we were facing a similar problem five years ago, when the PML-N government came to power. The-then government had turned to the IMF for a bailout package, and talks for the same are now rampant. There do not seem to be a lot of other options for Pakistan. Our closest ally, China, has already hinted that it believes Pakistan will tackle this issue on its own. Whatever avenue the country picks, the people should be prepared for rising inflation in the upcoming weeks. Keeping this in mind, the SBP has already increased the key interest rate by 175 basis points since January, taking it to 7.5% to tackle increasing inflationary pressure in the months to come.

After registering a 13-year high GDP growth rate of 5.8%, the economy has fallen fast. Despite taking numerous administrative measures and devaluing currency, Pakistan booked its highest trade deficit in history in the recently-ended fiscal year. Moreover, the foreign exchange reserves held by the SBP have also depleted to a disturbing level of $9.06 billion. Pakistan needs to quickly get its act together and resolve the crises that threaten to halt the growth of the economy.

Published in The Express Tribune, July 22^nd, 2018.

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