Current account deficit down by 36% in 2008-09

[Naveed Yaseen]

By Mushfiq Ahmad
KARACHI: Pakistan's current account deficit dropped to $8.861 billion in 2008-09 from $13.866 billion in 2007-08, a sharp decline of 36 percent.

The fall in current account deficit is the result of government's tight import policies-heavy regulatory duties were imposed on hundreds of items-and high interest rates, which reduced demand for goods in the country.

Besides, the fall in rupee's value against the greenback made imports expensive and, hence, curtailed demand for imported products. In the first half of 2007-08, the central bank of the country had kept the domestic currency overvalued, which allowed imports to rise sharply. It was only from January 2008 that State Bank of Pakistan let rupee fall against dollar. By October 2008, the domestic unit had lost 32 percent value against the US currency. This then discouraged imports. As a result, imports in 2008-09 cost Pakistan $31.716 billion, much lower than $35.397 billion of 2007-08, according to figures released by the central bank.

Another major factor behind the sharp drop in current account deficit was the fall in price of oil in the international market. Price of oil had risen steadily in 2007-08, which swelled the import bill. In 2008-09, price of oil plummeted from $147 per barrel to below $40 per barrel. This lowered the trade deficit of Pakistan significantly because oil import bill was the chief culprit behind the extraordinarily high trade deficit and resultant current account deficit in 2007-08.

Another factor that helped to bring down the current account deficit was $7.811 billion remittances, amounts that overseas Pakistanis send back home. It was higher by about $1.4 billion than last year's figure of $6.45 billion.

Besides, the services trade deficit also came down substantially. It moved from about $6.5 billion in 2007-08 to just $3.2 billion in 2008-09.

Shaukat Aziz and Ishrat Hussain, the economic mangers during General Pervez Musharraf's rule, were criticised for boosting growth by encouraging domestic consumption to rise instead of trying to make our economy export-driven. Although the current government has also failed to boost exports-in fact, exports under this government have fallen-it certainly has managed to control imports and thereby squeeze current and trade account deficits. These twin deficits had caused the foreign exchange reserves of the country to fall from over $16 billion in October 2007 to just $6 billion in November 2008 before the government obtained a $7.6 billion loan from the International Monetary Fund.

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