Current account versus financial account in Economics 

It was anticipated during Stand-By Arrangement (SBA) negotiations between the International Monetary Fund (IMF) and the government of Pakistan that improvements in the financial account would reduce the current account deficit anticipated as a result of the removal of exchange and import restrictions. However, this expectation has not come to pass.

According to the State Bank of Pakistan, the current account deficit for the period of July through August 2024 was negative 935 million dollars as opposed to negative 2035 million dollars in the same period the previous year, and the financial account registered a negative 3432 million dollar deficit as opposed to a negative 399 million dollar deficit.

The net incurrence of liabilities reached its peak in July and August of this year, up from a negative 8 million dollar amount in the first two months of the previous fiscal year (undoubtedly as a result of the cessation of all foreign inflows as a result of the failure of the then-finance minister, Ishaq Dar, to reach a staff-level agreement on the ninth review with the IMF). This includes 1776 million dollars for general government (which includes disbursements of 535

In July and August of this year, the overall balance was recorded at 2210 million dollars as opposed to a negative 1365 million dollars in the first two months of the previous fiscal year.

In other words, despite the sizeable foreign borrowings made after the SBA was approved by the Fund Board on July 12, 2023, the financial account is likely to be insufficient to cover the current account deficit in the months to come. As a result, there is a legitimate worry that the government's plan to use the financial account to offset the current account deficit would be compromised.

The guardians have encouraged remittance inflows through official channels, a factor in the current account deficit, by proposing that the federal government cover all fees associated with telegraphic transfers of $100 and more, at a cost to the treasury of 80 billion rupees.

There are worries that the crackdown on currency speculators may appreciate the rupee to the point where the illegal hundi/hawala system may continue to be alluring to overseas Pakistanis. Inflows from official channels that were disrupted after Ishaq Dar's flawed policy to control the rupee-dollar parity, a major reason for failure to reach a staff-level agreement on the ninth review, may be restored.

There is also concern that the government's primary surplus target of 0.4 percent for the current year may not be met, in large part because no attempts have been made to implement structural changes in the nation's tax structure, which is administered by the Ministry of Finance. These changes would make the tax system more equitable and non-anomalous by reducing the current high dependence on indirect taxes, whose incidence on the poor is greater than average. Reduce current spending, which is extremely inflationary because it isn't supported by an increase in productivity.

The budget for the current fiscal year can be criticised for the 61.3 billion rupees that the previous administration gave to lawmakers for development projects solely for political ends, as well as for the Fund's inexplicably approved increase in current expenditure that is a whopping 26 percent higher than the Fund's unrevised estimates for the previous fiscal year and more than 52 percent higher than what was budgeted for that year.

Even more troubling is the fact that the caretakers are employing the same plan as earlier elected governments: cutting back on development spending in order to free up money for current spending. This needs to alter.

At the expense of taxpayers, the majority of whom work in the private sector where unemployment is on the rise and earnings have stagnated over the past few years due to a reduction in productivity, those hired by the government have seen salary increases of 30 to 35 percent.

The petroleum levy is an indirect tax in this situation, therefore continuing to punish those who have already paid taxes could be setting a landmine that explodes in major socio-economic turmoil.

Although the recent increase in petrol and product prices that took effect on September 16 may have been just a pass-through, the public is aware that there is a charge of 60 rupees per litre.

It is hoped that the guardians will show some guts and backbone in order to negotiate with the stakeholders, especially government employees—civil and military—to change the tax code, expand the revenue base, and reduce current spending.