“Lai aai hai kahan par kismet hamain kahan se/ Yeh to wohi jagah hai guzrey they hum jahan se” (Fate has brought us to the same place we had visited) — from the movie Salgirah

THIS couplet aptly caricatures the gargantuan predicament of our profligacy and slack economic management, as reflected in a swelling current account deficit, now touching $1.2 billion a month. This is well beyond what can be called normal. Last year, the deficit was $12.4bn, even more than deficits in the previous four years combined. This happened despite a fall in the oil import bill by almost $5bn. The challenge of reducing and financing such a large deficit in absolute terms has seemingly emerged with a vengeance, within a year of the conclusion of the previous IMF programme, in which we entered to address a similar problem in 2013. Clearly, the stabilisation achieved during the programme’s tenure was superficial.

In our view, the present crisis is deeper and likely to be a more protracted one. Various structural factors and now a possible oil price shock are combining to result in a burgeoning of the current account deficit. The former include loss of competitiveness of our exports and continuing rise in imports. Excessive past borrowing to shore up reserves and artificially preserve the rupee’s value leading to big growth in repayment obligations, with an ongoing oil price shock in excess of 15 per cent expected to accentuate the impact of these negative factors.

The present crisis is deeper and likely to be a more protracted one.

The range of instruments put into play recently to ease the pressure — improvement of cash flows of exporters (through somewhat more timely tax refunds) and enhancement of regulatory duties (covering barely 15pc of imports) — will only address the growing stress fractionally. These steps have to be supplemented by additional measures we propose, including payments of duty drawbacks by banks along with export receipts, broader application of cash margins on imports, reducing substantially the taxes on fuel inputs and imports used for energy, increase in the presumptive income tax on commercial importers and larger incentives to promote export diversification, expounded at length in our earlier article (Sept 26). But without an adjustment in the value of the rupee the creeping speculation will not be curbed and competitiveness will not be restored. The impact of this additional set of measures on tax revenues is expected to be minimal.

To assess the scale of the task to manage the balance-of-payments financing requirements we’ve carried out two projections for 2017-18 and 2018-19, with the help of the Beaconhouse National University macro econometric model of Pakistan. The first scenario assumes continuation with just the measures already taken without any adjustment in the rupee value. The second includes implementation of the additional measures mentioned, along with significant downward revision in the rupee’s value before the close of this year, to remove rupee overvaluation currently approaching 21pc.

Under the ‘business as usual’ scenario, we expect exports to grow by 10pc each year in 2017-18 and 11pc in 2018-19, while imports are estimated to grow by 13pc this year and 14pc in 2018-19. The projected current account deficit is estimated to reach $17bn in 2017-18 and $23bn in 2018-19. Remittances will show only modest growth. However, interest payments on external debt could increase rapidly.

Foreign direct investment is expected to more than double by 2018-19, due particularly to inflow of Chinese funds for CPEC projects. However, repayment obligations will grow briskly on commercial debt along with maturity of $2bn of Sukuk bonds. Further, repayment of the IMF loan starts this year and grows rapidly in coming years. Consequently, whereas 51pc of the deficit could be financed in 2017-18 there would a 67pc gap in 2018-19 for financing the deficit. Reserves could fall to $7.8bn by end-June 2018, providing less than two months’ cover. Flotation of what are likely to be high-cost Sukuk/Euro bonds will only provide temporary relief, postponing the problem by up to three to four months. Towards the middle of 2018-19, the external payments situation will become unsustainable as we’ll fall well short of the required volume of funding.

A key question with regard to the second scenario is the likely response of the economy to rupee depreciation. The BNU model indicates that a10pc devaluation will lead on average to a 3pc increase in exports and a 7pc fall in imports in dollar terms (after accounting for the phasing out of CPEC power machinery imports and the tapering off of the inventory build-up in recent months in anticipation of rupee depreciation). We recognise that the projections are subject to a margin of error, hopefully on the positive side.

The projections in the second scenario show that exports could grow by 13pc in the full financial year 2017-18 and 19pc in 2018-19, facilitated also by an expansion in power supplies. Imports are estimated to increase by 14pc in 2017-18 and only 2pc in 2018-19, resulting in a current account deficit of $13.5bn in 2017-18 and $10bn in 2018-19. Reserves are projected at $11.5bn in June 2018 and $9.5bn in 2018-19, still remaining below three months of imports.

There is inevitably some concern also about the trade-off between rupee depreciation and the inflation rate. The second projection implies that the inflation rate could approach 7pc to 8pc by June 2018 and rise to 11pc to 12pc by 2018-19. Ways to reduce the inflationary impact would be to ensure stability in energy prices (partly through substitution by cheaper sources of energy — an improvement in the fuel mix) and bring down the procurement/ support prices of wheat and sugarcane in line with the fall in commodity prices.

The trade-off with respect to the GDP growth rate resulting from a moderate growth in imports and the impact of probable higher interest rates is likely to be at least partially mitigated by the faster growth in exports and CPEC investments. Factoring in these outcomes the economy is expected to grow at a pace below 5pc annually.

Clearly, the process of adjustment will have to be continued beyond 2018-19. Emergency provisions of GATT may be invoked by introduction of a regime of minimum import prices and introduction of more non-tariff barriers. Also, bigger export incentives may be offered. Going to the IMF has to be the last resort.

Dr Hafiz A. Pasha is a former commerce minister. Shahid Kardar is a former governor of the State Bank of Pakistan.

Published in Dawn, November 28th, 2017