Widening Trade Deficit
The SBP’s latest data has revealed that the country’s current account deficit (CAD) has widened to a four-month high at $1.245 billion in May 2022. This figure is 2.2 times higher than the deficit of $640 million recorded in May 2021, and 2.3 times higher when compared with the current account gap of $618 million in the previous month of April 2022. This persistent spiraling trend is a good indicator of how much the economy has suffered over the past year.
The economy has been under pressure due to a soaring CAD and falling foreign exchange reserves with the currency experiencing a sharp devaluation. This of course has made our already massive import bill even more expensive while exports have been going downhill.
The main reason for the widening CAD is the surging import bill, especially considering how the government had to purchase four expensive LNG cargoes from the global spot markets to meet growing domestic demand for energy. However, the worsening trade gap is not solely due to higher oil prices as the import bill during 11 months of the current fiscal year was $75.74 billion. The coalition government recently also announced a ban on luxury items to address this issue, but it appears that the results have been negligible.
In order to survive this crisis, it is imperative that we shore up our foreign exchange reserves and focus on strengthening the currency. The government has succeeded to avail $2.3 billion from China to support its falling foreign exchange reserves but the reports in media suggest that the Chinese inflow was costlier than earlier since the interest rate has increased.
The imminent revival of the IMF deal should also help with the inflow of money and the real effective exchange rate (REER) has also dropped which is an encouraging sign. The drop in REER is considered good for economies like Pakistan as it supports exports and discourages imports. However, it is critical that we stay the course and see through these tough but necessary stabilisation measures. We cannot afford to falter at any step and all efforts must be focused on achieving indigenous and sustainable growth.