Why Pakistan is facing a widening current account deficit

Pakistan is facing a widening current account deficit, caused by deepening external and internal factors. But business growth is good.
The current account deficit has come close to doubling to $4.716 billion during seven months of July-January of the current financial year 2016-17, the State Bank of Pakistan (SBP reported last week. What caused it? Rising cost of imports and imported oil, sluggish exports, chiefly textiles, declining FDI inflows, and less-than-previous receipt of home remittances sent by overseas Pakistanis.
The trade deficit for the seven months was $17.428 billion, up from $13,544 billion in the like period of 2015-16, the SBP said.
Despite several steps, the Ministry of Commerce has failed to reverse the tide of falling exports. These include Rs180 billion subsidy for export of key products, like textiles, leather products, carpets and surgical instruments. The overall annual exports continue to recede as they have in the past five years when the amount fell from $24 billion to $19.5 billion in the last fiscal year 2015-16.
The current account deficit during the past seven months equals 2.5 per cent of the current year's GDP. The deficit was lower in the like seven months of 2015-16 when it was 1.5 per cent of GDP.
The home remittances sent by overseas Pakistanis have been a major element, supporting the current account deficit and funding imports, including the rapidly rising import of oil. But, no more. In fact, analysts were projecting these years that overall amount of remittances, may beat total annual Pakistani exports. The actual remittances sent home by overseas Pakistanis, were down 1.87 per cent and totalled $10.946 billion in these seven months.
"The current account deficit is bound to increase in case the lower trend of remittances stay on during the remaining five months of fy-17," the SBP said. It said the declining remittances, rising prices of imported oil, shrinking FDI inflows and the continuing export slowdown, will build serous pressures on our CAD position.
"Everyone knows, we are doing our utmost to raise exports, but the effects of business slow down are weighing on us heavily, since it came down on the back of crash of international oil and commodity prices," Commerce Minister Khurrum Dastgir points out.
Imagine the state and size of exports. Despite the government's resolve and the private industry and business rolling up their sleeves and pushing exports, the quantity and earnings from them fell to $11.685 billion from $12.073 billion.
The imports, in the same period, were up at $29.113 billion compared to $25.617 billion in the like period of 2015-16. This disenchanting situation has claimed yet another casualty: the forex reserves are also receiving an hit due to overall scenario. The reserves, the SBP says, have declined to $21.924 billion, as at February 10. The amount includes $16.993 billion held by the SBP, while the rest is owned by the commercial banks.
A small amount of help was witnessed on account of FDI inflows. FDI inflows in the seven months rose to $1.161 billion, as compared to $1.056 billion in the same period of 2015-16.
Good news
But there is some good news, too. Reports are that more and more foreign companies, popular international brands and retailers are moving into Pakistan. At the same time foreign foods are being imported on a growing scale. One of these new arrivals is United Kingdom retailer Tesco; the grocery and general merchandise business has landed in Pakistan, and joined hands with Karachi's Alpha Supermarkets.
Nadeem Hussain, Alpha executive and chairman of Limestone Private, welcoming Tesco in Pakistan, said: "We plan to open 50 Express Stores in Pakistan with Tesco products to be sold across Pakistan in the next three years. This will be in addition to starting flagship stores at Karachi, Lahore and Islamabad. All Tesco products will be available across Pakistan."
Measured by profits, Tesco is the third-largest company in the world, and the fifth-largest company on the basis of its revenues. One report says Tesco has already invested $2b, mainly in the Karachi store. "Investment is projected to be doubled in the coming months," one of the company's associates said.
Finance Minister Ishaq Dar says this is an example that foreign investors now feel attracted to Pakistan, as a result of our all out efforts o build the economy, and provide full protection to foreign investors.
"I am happy that all types of businesses and foreign brands are coming to Pakistan, on the back of growing personal incomes. It will help reduce our costly imports from foreign companies, and let the people live a better life, and buy brands of their choice," Commerce Minister Khurrum Dastagir Khan says.
Bankers are quite satisfied over the state of FDI inflows, as it added to their normal business of handling cash for their domestic account holders, consumers, industrialists and exporters. "We hope that our bank income from all these segments will grow faster as the economy is projected to grow more than five per cent in FY-17," a senior banker said.
The writer is based in Islamabad. Views expressed are his own and do not reflect the newspaper's policy.