Managing the Balance of Payments Chapter 18: Managing the Balance of Payments The ultimate litmus test of the stability of the Pakistan economy rests on the state of the external balance of payments. This determines the level of foreign exchange reserves and the extent of change in the effective exchange rate. The experience of Pakistan during the last two decades is that the balance of payments tends to worsen during periods of relatively high GDP growth due to the large income elasticity of demand for imports, leading to a big increase in the trade deficit and consequently in the current account of the balance of payments. Also, the economy tends to be vulnerable to high oil prices. Pakistan has been in an IMF program in 21 out of the last 34 years. Recently, Pakistan has returned to the Extended Fund Facility which had been suspended due to COVID-19. The Program will continue till September 2022. The Fund will monitor Pakistan’s performance and support policies which lead to sustainability in the honoring of the external debt repayments. 18.1. Trends in the Balance of Payments The trends in key magnitudes of the balance of payments are presented in Table 18.1. There appears to be a cyclical pattern in the current account deficit from 2007-08 to 2019­20. The deficit was at its all-time peak as a percentage of the GDP in 2007-08. Thereafter, it declined and in 2010-11 there was a surplus. But the deficit started increasing from 2011­12 onwards and reached another peak deficit level in 2017-18. This was the largest deficit ever in absolute terms. Since 2017-18, there has again been a big improvement and 2020­21 has ended with only a small deficit of$1.8 billion on the current account. The financial account has had to move in a counter-cyclical fashion to the current account to ensure financing of the latter, especially through higher levels of external borrowing. The all-time peak of inflows into the financial account was 2017-18 when there was also the record current account deficit. Foreign exchange reserves have also shown considerable fluctuation. They fell to below two months of import cover in 2008-09 and Pakistan had to enter an IMF program for extra financing. The next time was in 2013-14 after yet another fall in reserves to a low level. This is the only Fund program that was successfully completed in 2016. 175