The love affair with current account surplus

In sheer excitement or plain ignorance, some spokespersons have been declaring the country in surplus

The Prime Minister Office, on Monday, issued a report card on the government’s performance in the pandemic-stricken 2020. In the economy, the current account surplus of $1.6 billion in the July-Nov period topped the list of achievements. In sheer excitement or plain ignorance, some in the regiment of spokespersons have been declaring the country in surplus. All it means is that the country received more dollars than it paid out in the said period. The activity in question is no more than a third of the economy. Nonetheless, the fact is interesting that the external sector has posted a surplus after a long time. The last time the event took place was some five years ago.

Surplus or deficit, the current balance must be contextualised, especially in the case of a developing economy. Persistent deficits are bad as the danger of a crisis requiring IMF bailouts is always there. This is not the case for the United States as it prints its own dollars. Nor does a persistent surplus worries the resource-rich Australia. In our case, it means we are exporting capital at a time when it is best utilised domestically. The source of surplus must be understood properly. Higher exports are considered a good source of surplus. In July-Nov of FY21, exports actually fell to $9,550 million from $10,285 million in FY20. Imports also fell to $18,163 million from $18,345. In a growing economy, exports are increased to pay for imports. The two depend on each other. It appears that the window of opportunity for the textile group, the largest export of the country, is beginning to close. Exports have declined as have textile-related imports, except for a bulge in import of raw cotton resulting from domestic policy negligence. There is also the impact of the reversal of some exports into imports at higher value, again as a result of policy ineptitude. Wheat imports cost $229 million and sugar imports another $96 million. The export of subsidised sugar in the corresponding period of FY20 had fetched $87 million.

As always, the saving grace has been the surge in workers’ remittances. FATF discipline forcing diversion to formal channels, savings resulting from travel restrictions following the pandemic, termination benefits of workers laid off due to economic slowdown and incentives announced in Pakistan, have all contributed to the unusually higher inflows. How long this shot in the arm lasts depends on the return to economic as well as diplomatic normalcy. There is, however, no substitute for putting in place a long-term growth framework to unleash the local potential. The recess from the IMF straitjacket allowed, in the words of the State Bank, “significant easing in both the monetary and fiscal policy stances” that led to revival of economic activity. These decisions were taken at the meetings of the Monetary and Fiscal Coordination Board. This Board, as well as the coordinated easing of policies, is likely to end once the IMF programme resumes. In this environment, growth projection of the World Bank at 0.5% makes more sense than the State Bank projection at 1.5-2.5%. Factor in the impact of the second wave of the pandemic and the looming uncertainty on the political horizon, and the growth may well remain in the negative territory even in the current year. This turn of economic events will also reflect decrease in import demand for export-related inputs and the consequential decline in exports. Assuming continuation of the present flow of remittances, the current account may again be in surplus, but with no love lost.

Published in The Express Tribune, January 8^th, 2021.

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