Overly optimistic?

The deficit in Pakistan’s current account looks to have been reduced. It has, though. According to data for the first quarter of the current fiscal year ending in September, the gap has decreased by 37 percent from a year earlier and by 49 percent from the previous quarter. So it is understandable why the governor of the State Bank anticipates that the deficit will remain well below $10 billion or less than 2.3 percent of GDP over the fiscal year. Compared to recent World Bank projections, which suggested that the gap would increase to 4.3 percent of GDP, and the State Bank’s forecast of 3 percent, the projected hole is significantly smaller.
The governor’s upbeat forecast also allays worries that the recent floods might add to the burden on the external account by increasing cotton and food imports after the crops were destroyed.
In order to achieve its external finance needs, which the IMF estimates to be close to $32 billion, Pakistan won’t need to hunt for any further foreign loans beyond those already earmarked for the current year. This should provide some relief to the cash-strapped government and its finance team, who are desperately trying to obtain rollovers and refinancing of the existing debt as well as seeking new loans to shore up reserves that have decreased to $7.9bn on debt payments of almost $1bn and meet foreign payment requirements.
In fact, the disparity being smaller than anticipated is a positive trend. Does this, however, signal a strengthening of the economy’s underlying principles? Will the exchange rate be under less stress as a result? Or offer Pakistanis some comfort from their suffering caused by the growing expense of living? Unfortunately, the answer is no. The causes of the ‘improvement’ are clear: a) the reduction in the current account gap is due to unusual import restrictions aimed at reducing the trade deficit, which is slowing the economy and leading to significant job losses; and b) strict controls imposed by the central bank on foreign exchange outflows through profit repatriation, which has resulted in the buildup of a payment backlog.
The limitations on the usage of credit and debit cards to get over State Bank import limits on one’s preferred goods may be regrettable. The fundamentals of the economy may not have altered at all as a result of the import restrictions. However, despite the 8.6 percent loss in family remittances and the slowdown in exports brought on by the unfavourable state of the world economy, these limits have managed to prevent the government from defaulting on its external debt. The recovery in the current account is essential for external stability, especially when reserves are depleting and, despite extensive damage from floods, no major relief from the IMF and others is forthcoming.
To give the economy some breathing room, the government and the central bank will eventually have to lift the prohibitions on imports and legitimate dollar outflows. When it happens, will we be prepared? The query is that.