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Opinion

The Current Account of Pakistan and the devaluation of Currency.

To understand our viewpoint, we need to evaluate a country’s current account and current account deficit and the factors which are harmful to an economy. The current account deficit in one country means the current account surplus in other nations. A country’s current account measures a country’s imports and exports of goods and services in a fiscal year or over a defined period.

To understand the Current Account of a country, we want our readers to get to know about the Balance of Payments.

Balance of Payments

BOP – Balance of Payments is a record of all payments of a country for trades in goods, services, and income flows. The Balance of Payments consists of a Current Account and Financial Account.

“To understand the equilibrium of Balance of Payments, a deficit on Current Account –like Trade in Goods, Trade in services, Investment Incomes, Transfer payments will be balanced by the Surplus on the FDI – Financial Direct Investment and more Portfolio Investments like Bond, savings. Simply, a country uses Capital inflows to finance the ‘utilization’ of investments and import consumptions.”

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The increase in the interest rates causes ‘Certificate Deposits’ or ‘hot-money’ to flows into the country. The short-term Investments or a hot-money is a fund controlled by the investors who seek short term returns. The flow of hot money is a surplus on the Financial Account of a country. 

The PTI Government attracts Overseas Pakistanis and Chinese and Malaysian and Turkish Investors through different Portfolio investments and CD – Certificate Deposit Schemes to balance the deficit of Current Account. The FDI – Foreign Direct Investments of more than US$ 1bn comes to Pakistan through different schemes in the year 2019-2020.

Trade Balance

We can simply define it that a trade balance is the value of exported goods minus the value of imported goods in a defined period. A positive value indicates is called ‘Trade Surplus’ whereas a ‘Trade Deficit’ indicates a negative value.

Balance of Payment affected by the spending on Imports

The higher rate of consumer spending on Imports (imported items) affects the balance of payment of a country. In President General Musharraf times, Pakistanis import a very high number of re-conditioned cars and split Air-conditioned units, caused a deficit on the current account.

Pakistan consistently running Trade Deficit for the last 17 years due to the energy Imports…

Another factor that disturbs the balance of payment of a country is its ‘higher inflation rate’ than its competitor country because the exports will be less competitive leading to lower demand.

A major factor behind less export is also the de-industrialization, but the post-COVID-19 world will be different. It is quite early to say that countries with more healthy Industrial units can survive in the modern world or the countries with advanced technologies will…

What is a Current Account (of a country)?

The Current Account of a country can be divided into visible and invisible types. For example Balance of Trade in goods is visible and the Balance of Trade in services is invisible (like Tourism and Insurance).

The Net income flows or the primary income flows are wages and investment income. And the Net current transfers or secondary income flows are government aids (unfortunately Pakistan is an aid receiving country therefore, no secondary transfer from Pakistan’s Current Account).

CAD – Current Account Deficit definition

In simple words, CAD – current account deficit means more imports and less export. It is a measurement of a country’s trade (imports/exports) where the value of the goods it Imports surpasses the value of the products it Exports.

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In a Country, the CAD – current account deficit means the value of total Imports of goods or services or investment incomes is greater than the value of exports.

“The existence of a Trade Deficit means that wealth is flowing out of the country… but any real country can run a trade –current account–deficit without a drop of debt.”

“The worst outcome of Current Account Deficits is more Foreigners will become the owner of the domestic assets …”

READ ALSO: PAKISTAN AT A GLANCE

Current Account deficit not always bad

Yes, Current Account Deficit is not always bad. We should go through the evaluation process of why there is a deficit in the current account of a country; the CAD is not bad and depends that how the deficit is financed, either by borrowing or capital flows. 

It depends on the causes of the deficit, high growth, or uncompetitive policies. As we mentioned above, it depends upon the number of foreign assets that CAD is not always bad. And the last thing, we should evaluate that if a country can devalue its currency. 

Current Account Deficit harmfulness to a country

The Current Account Deficit is financed through borrowing is unsustainable and a country will be burdened with higher interest payments. Pakistan is a country where its growth is unsustainable due to the higher interest rates because large interest payment has little left for investments.

CAD – Current Account Deficit is harmful if Investors lose confidence

A very high Balance of Payments of Current Account Deficits may cause foreign investors ‘loss of confidence’. If Foreign Investors remove their Investments, it causes a big fall in a currency devaluation and lower standards of living. When the confidence of Foreign Investors fell (like President Zardari times when the targeted killing and extortion was on peak in Karachi), the Investors seek to return the assets.

CAD – Current Account Deficit causes a country to lose long-term income opportunities

The most harmful effect of Current Account Deficit that the Foreigners own your land, means foreigners claim on your assets. The purchases of assets by Multinationals reduce the country’s long-term income.

Current Account Deficit, if it is persistent in a country then it is an indication of an unbalanced economy. It shows that the country focuses on domestic consumption with less investment in productivity.

Another harmful indicator of Current Account Deficit is that the exchange rate in the country is over-valued and the economy is uncompetitive. 

Currency devaluation is always on the run because of the country’s running large Current Account Deficit and insufficient capital flows to finance the deficit.

PAKISTANI RUPEE DEVALUATION – the Currency under depreciation Pressure due to CAD

The exceeding Import, and a tiny base of export with a big chunk relying on Textiles and 1/3rd Import bill consumed by the Oil import, these are all the factors behind Pak Rupee devaluation. The Pak rupee is depreciating for the last three years and still under pressure of depreciation majorly because Pakistan is not generating enough FOREX earnings.

In the year 2017, the Pak Rupee was trading at 106 (though it was an overvaluation) to the US Dollar just before Khan reigns in as the new Prime Minister of Pakistan. Today, Pak Rupee devalued more than 40% against the US Dollar.

Here comes the ‘hot-money’, the high yield attraction of PTI Government’s Bonds & CDs – Certificate Deposits to stabilize the Pak Rupee and the IMF financial support and receiving Aids from other countries and institutes also reduce the pressure on Pak Rupee.

Depleting FOREX Reserves

Any upcoming debt repayment that consumes more and more Forex reserves of Pakistan will multiply the rate of depreciation on Pak Rupee. This will not stop here, the sudden outflow of US Dollars at the time of maturity of CD and Short term Government bonds will accelerate the depreciation of Pak Rupee too. As soon as the COVID-19 is over, the Investors will directly persuade for the safe heavens and all money outflows into it mean Pak Rupee would depreciate at a higher rate.

The next two Budgets will be the toughest on Pakistanis…

There is no way out. At the time of Budgeting, experts must keep in mind that the Pak Rupee will shake off against the US Dollar and the depreciation of Pak Rupee will be picking up the pace.

The next 12 months (or more) will be seen as a year of Pak Rupee’s gradual depreciation. The devaluation happens simultaneously or consecutively in the whole year and Pakistani currency will get weaker and weaker till next year.

The higher tariff and skyrocketing Import duties and restrictions on several import items already decreased Imports from US$ 32bn to US$ 26bn. 

Due to the import ban and increased import duties, Pakistan observed a 72% lower Import deficit in 2019 and managed to record a Current Account Surplus in four years. Alhamdulillah the current account deficit shrinks to about 2.5% (equals to almost 5% of Pakistan GDP) a small gap left in the trade deficit, it will help Pakistan to save on its FOREX reserves and the FOREX stood up at US$ 18bn.

FDI – Foreign Direct investment flow is decreasing at a rate of 5% per annum. Any speculations or a panic outflow of these portfolio investments could be more severe for Pakistan and Pakistani currency.

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Sohail Yousuf

Sohail Yousuf is a content writer at SPF. He is a Master's in International Relations and loves to write.

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