Recent reports indicating widening deficits, imminent debt repayment and reversing portfolio investment make for sobering reading and vindicate our position that the government must proactively check fiscal drains or risk total collapse. Rupee weakening, too, exacerbates the balance of payments position, especially after the ambitious SBP rate cut. And with the currency’s fall paring gains registered at the beginning of the year, especially when double-dip fears have cut trade earnings from traditional export markets, the easy monetary policy must begin stimulating investment sooner rather than later to avoid a cumulative negative impact on the overall economy.
Now that the windfall from unexpected improvement in the current account, robust remittance inflow bidding up the rupee and cotton price hike in the international commodity market are petering out, we are back to widening trade and current account deficits, mounting debt repayment requirements with additional inflow jammed, and a low value-addition export mix that cannot extract maximum leverage from weak rupee dynamics. The present situation does not suit the government’s post-IMF policy direction stressing higher growth and improved corporate earnings to attract foreign investment. With FDI inflows declining 28.4 per cent y-o-y in the first quarter, and portfolio investment flows in equities and securities actually reversing ($46.5m outflow), it is difficult to see finance authorities juggling available options to engineer increasing GDP growth.
Unfortunately, official aid flows remain the largest contributor to the financial account. And while rumors of govt-IMF talks for a new aid program do the rounds, it is of critical importance for authorities to press for release of stalled funds under the pervious program, in addition to suspended coalition support fund payments, easing the immediate burden on the current account. At the risk of repetition, absent improved exports and less leakages, the growth recovery will not materialise.