During the first half of the ongoing 2021-22, between July-Dec 2021, Pakistan’s fiscal deficit stood around Rs1.372 trillion or 2.1 per cent of GDP of Rs63.978tr, according to the Ministry of Finance. The State Bank of Pakistan’s (SBP) balance of payments record shows that during the same period, the country’s current account deficit shot up to $9.092 billion.

The twin deficit continues to exist. But can we expect a substantial easing in either of them anytime soon? Sadly, the answer is No.

During the second half of FY22 (Jan-June 2022), the fiscal deficit is bound to grow further chiefly for two reasons. First, traditionally, the fiscal deficit in the first half shows a slower buildup and grows rapidly in the second half. Secondly, the PTI government — currently struggling with multiple challenges — is accelerating public spending to retain political capital.

Meanwhile, further growth in the current account deficit in the second half of FY22 also seems inevitable for two reasons: first, higher global fuel oil prices would continue to inflate the import bill, thus making it more challenging to control trade deficit. And secondly, decelerating growth in our home remittances would now provide a thinner cushion to the current account than in the past. Crude oil prices shot up from around $78.6 per barrel at the end of December 2021 to $93.4 per barrel on Feb 15. And, the growth rate of remittances tumbled to 9.1pc during July-Jan FY22 from 24pc in July-Jan FY21, according to the SBP.

We are now at a stage where after meeting the annual debt servicing obligations — and after financing defence and administrative budgets — little is left for developmental expenses

No or negligible easing in the twin deficit in the ongoing second half of FY22 mean no or negligible easing in both or either of the two deficits also in FY23, the last year of the PTI government. If that happens, keeping inflation under check and containing the rise in indebtedness, too, would become all the more difficult, compounding politico-economic challenges for the government.

Fiscal deficit, current account deficit or both at the same time are not necessarily damaging for an economy. What one has to look at is whether the twin deficit or any of the two are “structural” or “cyclical” in nature. Structural deficits are bad — and may turn worse — if they are allowed to persist for a long period.

Pakistan’s fiscal deficit is structural. The country has long been struggling to meet its expenses with tax and non-tax revenue and has long been filling in the gap through internal and external borrowings. Continuous buildups in such borrowings mean an increase in the annual debt servicing obligations. We are now at a stage that after meeting those obligations — and after financing defence and administrative budgets — little is left for developmental expenses. And, low-level developmental spending continuously makes it difficult to lay a solid foundation of sustainable economic growth in future.

In the first half of this fiscal year, internal and external debt servicing was equal to 31pc of the current expenses and a little more than 27pc of the total expenses, a careful reading of the fiscal operations statement reveals. By the end of the year in June, no relief can be expected. In fact, domestic debt servicing that forms the bulk of the total annual mark-up payments on government loans should increase due to the increase in the cost of bank loans being obtained at higher rates after the recent monetary tightening.

The Federal Board of Revenue’s (FBR) tax collection has risen 30.6pc year-on-year in seven months of the current fiscal year and also exceeded the target set for this period. But the economy during this fiscal year is growing slower than in the last year and to contain a meteoric rise in imports bill the government has already taken some measures to check growth in imports.

These two factors, put together, could affect the rising trend in overall tax collection. As for the Board’s recent move to start taxing incomes of local owners of the offshore companies, it is too early to predict how much additional revenue it could bring during this fiscal year — or even in the next year. A lot depends on the professional ability of FBR and ever-changing “political necessities”.

The current deficit of $9bn in the first half of FY22 is also expected to rise to at least $18bn or even past this level because of the cumulative trade account deficit ie the gap between imports and exports of both goods as well as services is too large to be plugged within six months. According to the SBP stats, this overall trade deficit in July-Dec 2021 surged past $23bn from just $12.33bn in July-Dec 2020. The size of the deficit is so large that $15.8bn remittances during the same period fell too short to provide enough cushion and resultantly the country witnessed a large current account deficit.

The measures taken to curb imports of non-essential goods and tighter interest rates have started showing results as month-on-month growth in imports bills turned negative in Dec 2021 and Jan 2022. But the cumulative import bill during July-Jan FY22 still shows a mind-boggling 59pc year-on-year increase, according to the Pakistan Bureau of Statistics. Such a large increase cannot be reduced substantially in months — more so because fuel oil prices remain fundamentally strong — notwithstanding an early retreat after the tension between Russia and the US over Ukraine eased, following Russian President Putin’s Feb 15 remarks that Moscow was ready to engage in talks with the West on missile deployment and transparency of military drills.

Published in Dawn, The Business and Finance Weekly, January 21st, 2022