By Shahbaz Rana
Published in The Express Tribune on April 28, 2023
ISLAMABAD: The government has projected a $9.2 billion current account deficit (CAD) for the next fiscal year, which will keep Pakistan’s total external financing requirements over $34 billion for the second consecutive year.
Compared to the rise in the CAD and total external financing needs, the two most crucial non-debt-creating inflows – exports and remittances – are projected to grow nominally.
The proposed Medium-term three-year Macroeconomic Framework shows a subdued increase in exports and foreign remittances in FY2023-24, according to sources in the Ministry of Finance.
The cumulative receipts of exports and remittances have been projected at $61 billion for FY2023-24 – almost equal to the imports in the next fiscal year, starting from July.
This means the country will meet its external debt obligations of around $25 billion in FY2023-24 through a combination of fresh foreign borrowing and seeking rollovers of the existing financing facilities extended by Saudi Arabia, the United Arab Emirates and China.
According to the proposed plan, which still has to undergo executive approvals, the CAD could widen to $9.2 billion or 2.3% of the GDP in the next fiscal year.
This is $2.2 billion or over 31% higher than the downward revised estimates of a $7 billion deficit in the outgoing fiscal year, said the sources.
These figures will undergo further changes once the final annual CAD deficit figures are available.
Based on the external debt position as of last year, Pakistan needs nearly $25 billion for repayment of principal loans and interest costs, according to sources in the Ministry of Economic Affairs.
This will bring the total external financing requirements to over $34 billion in the next fiscal year too, underscoring the need for yet another bailout programme by the International Monetary Fund (IMF).
The $25 billion repayments include $15 billion of shortterm loans.
The short-term debt repayments include $4 billion in Chinese SAFE deposits, $3 billion in Saudi deposits, and $2 billion in UAE deposits.
Such mounting debt payments pressure presumably requires extraordinary efforts to address the country’s chronic issues undermining exports and foreign direct investment (FDI).
But details showed that no major incremental inflows are projected for the next fiscal year.
This is despite the fact that the Ministry of Finance recognises that containing the CAD was necessary because of growing indebtedness.
The draft report stated that ignoring the persistent CAD will eventually trigger some disruptive adjustments including currency depreciation and sharp adjustment in domestic demand.
Therefore, the government will focus on containing the trade deficit to ensure smooth adjustment.
According to the projections for the next fiscal, the exports may grow to $30.1 billion, $2 billion or 7.5% more than the revised estimates for this fiscal year.
The finance ministry stated that the global trade forecast will impact Pakistan’s export demand and it is expected that exports in goods will be contained to around $28 billion this year.
Compared to the budget target of $38 billion, there is a dip of $10 billion – a sum that is compensated by increasing borrowings or containing the imports.
On the export side, sluggish foreign demand, and domestic supply issues, following the floods-induced destruction of exportable crops are responsible for the weak export performance.
It added that the year 2023 will be a tougher year than 2022 was, which will further contain global trade demand.
According to WTO, world trade will remain subdued in 2023 as multiple shocks weigh on the global economy.
The remittances are shown at $30.9 billion in the next fiscal year – up by $1.4 billion or 4.7% against the revised estimates of this fiscal year.
During the first eight months of the fiscal year, remittances posted a negative growth of nearly 11% to $18 billion, reflecting a widening gap between the interbank and open market exchange rates.
The Ministry of Finance has projected imports to grow to $60.5 billion next year, showing an increase of $5 billion or 9%.
The projected trade deficit for next year is $30.4 billion – planned to be plugged through remittances.
Pressure on the import bill increased during FY2022 when the economy grew by about 6% on the back of consumption.
To ease the pressure of import bills and to contain CAD at a sustainable level, the government stopped imports through regulatory and administrative measures.
As a result, Pakistan’s imports are on a declining trend, now estimated at $55.5 billion.
The finance ministry stated that the government’s policies are paying off in the form of reduced imports and restrained local demand, which will further materialise in the coming months for imports.
Global disruptions and challenges are continued to trigger problems for world trade and Pakistan is no exception, according to the draft medium-term report.
Although the framework has given projections for the three fiscal years but due to the rapidly changing environment, these projections are not relevant.
The Ministry of Finance again does not see any improvement in low ratios of investment and savings as a percentage of the GDP.
For this year, the investment-to-GDP ratio had been targeted at 14.7% but the revised estimates show that the ratio might touch 14%, missing the target again.
For next year, the investment-to-GDP ratio has been projected at 14.2%.
The saving-to-GDP target of 12.5% will too be missed for this fiscal year, which is now estimated at around 12%.
For the next fiscal year, the savings are projected to go down further due to the relatively widening current account deficit.
Insufficient savings and investment have caused significant hurdles for Pakistan in reaching its growth potential over the years, admitted the ministry.