CAD challenge
Rising crude oil prices continue to fuel the widening current account deficit, even though import volumes have actually fallen. Meanwhile, rising food prices have also hit the current account, as the value of essential imports such as cooking oil continues to appreciate. However, government planners cannot wave away the current account crisis as being caused by external factors. Among the other big import heads is machinery, demand for which has shot up since the SBP introduced the Temporary Economic Refinance Facility, which made it easy to finance machinery which, while necessary for industrial expansion and export growth, has been a massive drain on foreign reserves.
Only a few months removed from reserves hitting record highs, we are now in a position where the country — despite still having over $17 billion in the SBP’s coffers — barely has enough cash on hand to cover the deficit for two more months. While dollars will invariably flow in to fill the gap, the astounding margin means that the impact of this additional financing will be like none before. At the same time, exports — already at record levels — cannot be expected to grow significantly enough to bridge the gap. Conversely, efforts could be made to control the import tab. But despite fuel prices consistently moving upwards and demand certain to rise alongside population, replacement strategies have not been forthcoming.
One of the few alternatives has been increased use of local coal for power production, but even this is not a long-term solution, because local coal is mostly lignite, which is the lowest grade and most polluting type of coal. Using it will be extremely bad for the environment and could even lead donors to reduce climate change mitigation aid money. There is also the matter of freshwater needed to operate coal plants, meaning another drain on the water-starved country. That leaves the suggestion of reducing machinery imports. However, if this were mismanaged, it could snowball into a reduction in exports, bringing everything back to square one.
Unfortunately, solid solutions will not be easy to come by, with rampant inflation — now the worst among Asia’s large economies — making decision-making even harder for the government.
Published in The Express Tribune, January 30th, 2022.
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