A deficit that is widening

On November 11, the government released figures for Pakistan’s trade balance. The trade deficit widened by 36%.

On November 11, the government released figures for Pakistan’s trade balance and the report was not good: exports declined in October, compared to the same period in the previous year, and imports increased. The trade deficit widened by a worrying 36 per cent. Unto itself, monthly variations are not necessarily problematic or even unusual. But this government had based its fiscal policies on strong export figures, along with a continuation of record remittances from expatriate Pakistanis. Now that those predictably faulty assumptions have begun falling apart, the ministry of finance is likely to begin panicking, not a state one would hope to see the nation’s top economic managers in, at a time of global financial crises. The government had been relying on strong exports and remittances to keep the current account either balanced or only mildly negative, which in turn would have kept the rupee’s exchange rate with the dollar stable. If the rupee depreciates by a significant amount, the government’s repayments of foreign debt (nearly $3 billion this year) will become more expensive and weaken an already tenuous effort to control the budget deficit.

It is not the government’s fault, of course, that exports have weakened as the global economy is slowing down. Imports, meanwhile, are rising due to what is perceived as a recovery in local manufacturing, which has seen equipment imports go up. At the same time, the costs of commodity imports have risen owing to rising prices and a depreciating rupee. Yet, the government’s decision to base critical fiscal plans on what were very obviously faulty assumptions is certainly blameworthy. If the country now faces a balance of payments crisis, it will not be due to some exogenous shock but because the administration decided to delude itself. At a time when most governments in Asia are marshalling their resources to prepare for a prolonged global economic slowdown, for Islamabad to have made such a flawed decision is a dangerous disregard of duty.

Published in The Express Tribune, November 14^th,  2011.