State Bank of Pakistan Governor Reza Baqir on Friday said that Pakistan is looking at a current account deficit this year that is 2-3% of the Gross Domestic Product.
Addressing a press conference in Islamabad, Baqir said that the State Bank, in its last monetary policy statement, said that it is looking at a current account deficit of 2-3% of the GDP “which roughly translates to $6.5-9.5 billion”.
He said that a lot of people expressed concern and inquired whether that was a sustainable level.
“In our assessment, it is a sustainable level of current account deficit.
“In emerging markets, especially where the economy is improving, where the GDP is on the rise, a moderate level of current account deficit is not bad news, it is good news,” he explained.
Three ‘alarm bells’
Baqir said international experience tells us that there are three “alarm bells” for a country whose current account deficit is on the rise.
“In Pakistan’s case, not even one of the three alarm bells is ringing,” he said.
The SBP governor went on to explain that the first thing to watch out for is “the level of the current account deficit”.
“In the past, we encountered problems when our current account deficit reached 6% of GDP. You may recall that after that, our reserves experienced a loss that forced us to go to the IMF (International Monetary Fund),” he said.
He said the level of current account deficit is not at an unsustainable level so there is no cause for alarm in this area.
The other possible alarm bell, he said, is if the current account deficit is rising and the exchange rate is not adjusting in accordance, especially in the case of countries that have a market-based exchange rate.
“This is an alarm bell because this is a natural phenomenon that when outflows are greater than inflows, and imports are increasing disproportionately to exports, the exchange rate sees an adjustment because it is a market mechanism.
“So if there is a situation when the exchange rate does not adjust, it is a cause for alarm,” Baqir said.
“If the exchange rate in a country with a market-based exchange rate shows a good, two-way adjustment, like in Pakistan, it is a positive indicator,” the SBP governor said.
He said that third “alarm bell” pertains to low reserves. “Our country is seeing the reverse. Our reserves are increasing.”
Baqir said that therefore, one must remember that these alarm bells indicate whether a current account deficit is unsustainable and in the past, when Pakistan had unsustainable levels, all these warning signs were there.