Are deficits always a bad thing?

Byline: Khurram Husain

IN his speech before parliament on June 25, Prime Minister Imran Khan made a number of assertions that are worth reflecting on, even if somewhat belatedly, because they impact the way we think about our economy. Two things he said deserve to be reflected on seriously because they both point to persistent problems in our economy, as well as the quality of economic management we have seen over the decades.

First, he said that the presence of a current account deficit is a sign that the economy is 'ill'. Second, he pointed to the improvement in the primary deficit of the country in the second year of his rule as evidence of sound macroeconomic management. But is he right in making these assertions? Is it true that deficits, especially the ones he pointed to, are always bad and bridging these should always be the top priority of any government?

Consider the evidence. All countries in our region - India, Bangladesh and Sri Lanka to take three examples - have run a current account deficit as well as a primary deficit on their fiscal account more or less non-stop since at least 1990. Their economic management has not been defined by frantic efforts to bridge these deficits. In fact, they have found ways to manage and finance these deficits without going bankrupt every few years like we do. For example, we have gone to the IMF for balance-of-payments support to manage the current account deficit 13 times since 1988. Sri Lanka is next, with six approaches in the same period, Bangladesh four and India one.

All three countries have demonstrated healthy growth rates over the same years. Their experience with balance-of-payments crises and the fact that they both have protracted current account deficits shows that these need not necessarily lead to ruination.

Is it true that deficits are always bad and bridging these should be the top priority of any government?

India is another example of a country with prolonged current account deficits since 1990 ranging between negative one and two per cent of GDP throughout the period except for a few years in the early 2000s.

These countries are only a few examples. One could point to countries like the UK or the US that have had persistent and uninterrupted current account deficits since 1990; however, one could easily counter that those are developed economies and their circumstances are very different from ours, which would be a fair argument. But how does one explain the persistent...