The twin deficits | By Muhammad Zubair


The twin deficits

FOR 3 years we have been informed by the PTI leadership that the only macro economic indicators that matter are the twin deficits – trade & current account.

In a major policy statement in the parliament in 2020, Imran khan claimed that all is well as far as the economy is concerned.

As a proof, he referred to the trade & current account deficits which were largely in control at that time.

For the PM and his top economic team, nothing else was important enough – no inflation, no unemployment, no poverty.

GDP growth was important according to the PTI financial wizards but so far the twin deficits remain under control, there was nothing to worry on the economic front.

The PTI formula of controlling trade & current account deficits never made sense – completely shut down economic activity and achieve significant reduction in the deficits.

And to achieve that, they took those poor decisions within the first 7-8 months including doubling of interest rates and massive currency devaluation.

These decisions led to devastating economic consequences which for the PTI leadership did not count at the time. Obviously with no economic activity, the two deficits remained under control.

As soon as the economic activity revived, the trade deficit has hit a record high of 7.5 billion dollars in the first 2 months of the current fiscal year. At the present rate of imports, this fiscal year will probably end with the largest ever trade deficit and a significant rise in current account deficit.

Nothing could have been more bizarre than this economic philosophy. Of course it is important to control the current account deficit – there is no argument about this.

However there are occasions when one needs to sacrifice the twin deficits in order to achieve other fundamental economic indicators such as controlling inflation, higher growth, reducing fiscal deficit, reducing un-employment and bringing large chunks of popu-lation out of the poverty trap.

Letting the current account deficit balloon higher than reasonable levels can only be allowed for a short term to medium term and only for very justifiable rea-sons.

There must also be a back up plan how the current account deficit will be brought down within reasonable levels.

The PMLN had a clear strategy to cope with a high current account deficit. The trade & current account deficits remained within reasonable range during the first three & a half years of the PMLN tenure. There was nothing to worry in that period while the economy performed re-markably well.

Growth was going up, fiscal defi-cit was going down, inflation was at record low levels, discount rate at a 40 year low, unem-ployment was coming down at record pace and almost 2 crore poor Pakistanis were brought out of the poverty trap.

Around the 4th year of its tenure, major power projects were nearing completion and billions of dollars of plant & machinery was to be imported to ensure completion before the end of its tenure. In addition, several CPEC related pro-jects were in the final phase.

Before elections 2013, the PMLN made a commitment to completely resolve the energy crises by May 2018. Pakistan was in a serious crises when the party formed the government in June 2013. Both the industry as well as citizens faced energy shortages of unprecedented pro-portions.

In urban cities like Lahore and Islama-bad, load shedding of up to 12 hours on daily basis was normal while rural areas went without electricity for 18-20 hours per day. This was unsustainable.

The industry suffered immensely contributing to a serious economic crises. Led by PM Nawaz Sharif, the party ensured enough ca-pacity projects start operations before its term ends in May 2018.

The PMLN government delivered on its key promise ensuring Pakistan is finally free of en-ergy shortages. This was a Herculean task but it does involve taking certain economic risks – pri-marily the ballooning of the current account deficit.

But there was a clearly defined plan on how the deficit will be brought under control within the short to medium term.

Economic decisions are always difficult. With every upside, there is a possible downside as well. Nothing comes free.

The choice for the PMLN leadership was simple – resolve energy crises & let the country be free of any electricity shortages or let the country remain in perpetual darkness

The choice we made meant taking the country out of darkness knowing fully well that massive imports of plant & machinery will result in higher than normal current account deficit.

Will the PTI leadership let us know what choice they would have made given the same circum-stances? Whenever this question has been raised, the PTI leadership has shied away to an-swer this basic question.

Interestingly though, the current account deficit as a percentage of GDP was higher when General Musharraf left the government in 2008 compared to what PTI in-herited in 2018.

But Imran Khan and his eco-nomic team have never been critical of the high twin deficits during the Musharraf regime (of course for understandable reasons). Even the media has never raised this issue – again for un-derstandable reasons.

The PTI leadership has only spoken about the high trade & current account deficits inherited when it came in power.

But what about the mas-sive benefits of uninterrupted electricity sup-plies? What about the industrial production which is no more at the mercy of electricity breakdowns? Have we ever calculated the eco-nomic benefits of uninterrupted electricity? And most important what about the peace for the people of Pakistan who no longer have to live a life of constant energy breakdowns.

Imagine Pakistan without those LNG plants which is the most efficient means of providing cheap electricity.

In less than 3 years, all those LNG plants were conceived, planned and com-pleted before the PMLN tenure ended in May 2018.

Left to the present government, not a brick would have been added in the last 3 years (Kara-chi’s Greenline transportation project is a great example.

More than 75% of the work had been completed by May 2018; yet 3 years on we are still awaiting completion. And Green line is a much much simpler project).

The PTI leadership faces a dilemma – how to justify the record increase in imports without corresponding increase in exports. What justifi-cation to give now as the two deficits reach re-cord levels. Nothing to worry though – We will soon hear Mr Imran Khan taking another U turn.


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