The estimated trade deficit in the budget of the ongoing year is around $38 billion, an all-time high in the history of Pakistan. The current account deficit has been estimated to remain at $5-6 billion even if Pakistan achieves the target of the estimated $31 billion foreign remittances in this fiscal year. The question arises why we have been stuck in an economic crisis throughout our history. Two persistent problems – current and fiscal account deficits – have long been showing no signs of hope for a sustainable economic growth of Pakistan.
The current government is trotting out the cliché that Pakistan is heading forward on the right track, but the figures portray something else that is contrary to the optimistic rhetoric. The current account deficit is the longstanding problem of Pakistan faced by successive governments, but no one tried to resolve it effectively. The tenure of General Pervez Musharraf was marked as the period of an economic boom. If that was truly the case, why did he leave his government with a leviathan of a current account deficit? Although his government faced a current account surplus for a temporary period, it was not sustainable. What always happens in Pakistan is an economic spurt followed by a marked decline.
Is it a mere coincidence or does it involve a systemic failure that all governments fall prey to a boom-and-bust cycle? Between 2000-2003, Pakistan’s current account balance had been in surplus. However, from a surplus of $3.5 billion in 2003, the current account plummeted to a deficit of $3.6 billion by 2005. It was the fiscal year 2008 when the current account deficit touched 9.2 percent of GDP, the highest level it has ever reached in our economic history, to date.
The next government approached the IMF. Why did that happen? Because the current account problem was cushioned by foreign remittances and not by enhancing the export portfolio. The State Bank stated, “It has been the sustainability of workers’ remittances at around $4bn a year that has contained the overall balance of payments.”
The PPP government approached the IMF and sought a bailout to meet the immediate balance of the payment crisis. Although during PPP’s tenure the exports grew by 4 percent, a considerable role was played by foreign remittances on the side of the current account deficit. The remittances were 16.7 percent to GDP.
The same story was repeated in the next growth spurt during the PML-N government’s term that began in 2013, reached its peak in 2016, and crashed in 2017. In November 2014, the State Bank pointed to remittances that were 7.4 percent to GDP and became the main source of strength in the external sector whereas the trade deficit exacerbated because Pakistan was not making progress to enhance its export portfolio.
The PML-N was succeeded by the PTI. The story continues. The incumbent government has expressed happiness after the current account turned into surplus. If it is sustainable, why do we need to go to the IMF again? According to the recent reports, Bangladesh has increased its exports to $40 billion while Pakistan is below $30 billion. The exports of the country in 1998 were $8 billion, which grew to $25 billion, whereas India crossed $300 billion from $36 billion in the same period. Certainly, the growth in foreign remittances is a positive development, but it is not sustainable unless we grow our exports and attract foreign direct investment. In Pakistan, the share of foreign direct investment to GDP is only one percent. Many companies are leaving Pakistan, and many are reluctant to invest in Pakistan due to the issues of project litigation, property laws, and weak diplomacy.
Many international companies started outsourcing their work from China after the emergence of the COVID-19 pandemic and looked for a new destination. Pakistan could not offer them a safe environment as it is ranked 108 out of 120 countries in the Ease of Doing Business (EoDB) list. Pakistan should improve its position in the EoDB to attract foreign investors to stabilise its current account. Mere reliance on foreign remittances is bound to frustrate us ultimately and lead us to the door of the IMF.
Pakistan should address its major issues to ensure sustainable economic growth. Enhancing exports and attracting foreign direct investment coupled with sustainable foreign remittances are highly pertinent for stabilising the long-standing current deficit problem, which is a festering wound for Pakistan.