(1/N) Interesting question! There is nothing wrong with CAD in principle. But international financial markets (those financing CAD) need to be convinced tht the country will have necessary repayment capacity going in future. Less developed countries are pretty bad at this. Why?
(2/N) Need to ask another question to answer this: How r we allocating financial resources which international markets r putting at our disposal? r we allocating these to sectors which r most productive? Or, r we allocating these to least productive sectors such as real estate?
(3/N) With inefficient financial markets, poor contract enforcement, large information asymmetries, ad-hoc policy changes, strong interest-groups, formal/informal trade barriers, corrupt decision-making processes… hard to convince any1 tht resources r being allocated efficiently
(4/N) Not too difficult to see tht international markets panicked even in case of East Asian economies wen CAD crossed a certain threshold during mid 90s. Easy to comment with hindsight that a lot of financial inflows EA countries were enjoying had landed in unproductive sectors
(5/N) Since then, these countries have taken several measures and put in place safeguards in an attempt to not only improve their repayment capacity but also assure international markets of their repayment capacity: adb.org/publications/2…
(6/N) Bringing it home, can we think of any good reason why international financial markets should have continued financing our CAD when: Exports-to-GDP ratio declined from 13.3% in 2013 to 8.5% in 2018; External debt-to-exports ratio increased from 245% in 2013 to 426% in 2019?
(7/N) In the short run, only way out is to contain our financial requirements (i.e. decrease CAD) & make ourselves more attractive to international financial markets (higher interest rates). This is surely painful but don’t forget the party we had just thrown using borrowed money
(8/N) In the long run, it is all about addressing (3/N) and improving productivity of the economy. This continues to remain a challenge even when our financials are improving (aka stabalisation): dawn.com/news/1507479/p…
(N/N) My fear is not that inflation will not come down & growth will not recover... but that we will, as always, forget about addressing these deeper problems once stabilisation is achieved. This is where we need to push the government as in this Editorial dawn.com/news/1515585/f…
P.S. There would have been no need for most of this discussion if we were worried about repayment capacity in domestic currency. Unfortunately, SBP's printing machines are a bit constrained when it comes to printing foreign currency.
