SBP’s high hopes

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The June spike in the current account deficit notwithstanding, the State Bank doesn’t look too worried about the gap between the country’s projected foreign payments and income getting out of hand during this fiscal. Announcing the monetary policy for the next two months on Tuesday, State Bank governor Reza Baqir said the bank expected the deficit to remain in the sustainable range of 2pc-3pc of GDP in FY2022. This is in spite of the likely growth in imports — though more moderately than in the previous year — on the back of robust domestic recovery and rebound in global commodity prices. The bank is also hopeful that the forex reserves position will continue to improve owing to adequate availability of external financing. Its prediction of a manageable current account deficit implies that it considers the sharp sudden spike in the latter to $650m and $1.6bn in May and June nothing more than an aberration triggered by certain one-off imports.
The last fiscal was good insofar as the balance-of payments position was concerned. Even though the current account deficit started to widen in the second half of FY2021 because of growing imports, the year ended with the deficit equal to just 0.6pc of GDP, the lowest in a decade and easy to finance with elevated remittances. Reserves increased by $5.2bn. The bank has noted that “Pakistan’s external position last fiscal was at its strongest in several years”. But that doesn’t mean all is well. In addition to the near-term likelihood of oil and commodity price volatility, medium- to long-term risks remain. The major threat comes from our inability to rapidly grow exports to finance the increasing import bill. Last year, exceptionally high remittances had come to the rescue of the government. What if these flows flatten or start sliding once Covid-19 travel restrictions are lifted? Also, successive governments have failed to make Pakistan an attractive destination for long-term, non-debt-creating FDI. Eventually, Pakistan has to depend on foreign currency loans to fill the gap and maintain forex reserves at a minimum threshold. No wonder the government and the State Bank are always looking to line up more debt from bilateral, multilateral and commercial sources even if they have to pay a financial and political price. The government should implement structural reforms to boost exports and FDI, as well as reduce its reliance on imported luxuries for longer-term external sector stability that is not built on borrowed dollars.