Pakistan's economy in-between IMF and FATF trap.

Byline: Ahsan Nisar

A trade deficit occurs when an economy is importing more goods than it is exporting. The deficit equals the value of goods imported less the value of goods being exported. For example, Pakistan is importing goods worth USD 15 billion from China while exporting goods worth USD 1.8 billion only, the trade deficit with China would be USD 13.2 billion.

However, a country's net receipt and payment positions are computed with the help of other accounts known as current and financial accounts which are then totaled to arrive at the balance of payments figure. The current account is used as a measure for all the amounts involved in importing and exporting goods and services, any interest earned from foreign sources and any money transfers between countries. The financial account is made up of the total changes in foreign and domestic property ownership. The net amount of these accounts is then consolidated to arrive at the balance of payments position.

Some of the impacts of prolonged trade deficit on the economy of a country especially the financial sector are highlighted below:

1. Since the economy would be more dependent on imported goods, many of the local industries would close down with the passage of time. The economy would be transformed into a trading house rather than manufacturing hub. Ultimately, the need for financing would decline affecting adversely on the profitability of the financial sector.

2. With fewer investment opportunities available domestically, the investors would begin to invest in foreign markets where the conditions are more conducive. Currently Pakistan is facing a similar type of situation. The decline in domestic business has led to an outflow of funds to other countries like Bangladesh and African countries.

3. The adverse balance of trade accompanied with adverse balance of payments resultantly would have negative impact on the external value of the domestic currency. It would fuel inflation and the public confidence in the domestic currency would be weakened. The prolonged foreign borrowing would enslave the domestic economy on the terms dictated by the lenders. Pakistan had been approaching, time and again, International Monetary Fund (IMF) and other lending agencies for borrowing to meet trade and balance of payments deficits. Consequently, the policies pursued by the economic...