Are deficits always a bad thing?- 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.

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 deficits and persistent growth rates in our region, without as frequent recourse to the IMF as Pakistan has been availing itself of since 1990?

The story is the same with the deficit on what is called the primary balance. The current account deficit measures the difference in a country’s transactions with the outside world — how much it earns from outside versus how much it spends in markets abroad. The primary balance, on the other hand, is a strict measure of a government’s ability to service its debts. It measures the difference between the amount of money a government collects in revenue and the amount it spends on everything except debt servicing. If the primary balance is negative, it means the government will have to borrow to repay its debts, which in the orthodoxy of neoliberal economists is considered to be a bad situation.

I do not recall ever seeing a sitting prime minister stand in parliament and invoke his government’s success in bringing the primary balance out of deficit like Khan did on June 25. The reason is that the primary balance has nothing to do with the people. It is an indicator watched by the country’s creditors, particularly its foreign creditors, and any government would usually invoke its success in managing this indicator when presenting its case before its creditors, for example, during the road show before floating a bond. For the people, bringing the primary balance into surplus usually means a great deal of pain, because the government has to raise taxes and cut spending for it.

Next thing to note is that every government in Pakistan has reduced the primary deficit in the first year of an IMF programme. This is pretty much the only requirement of every programme that Pakistan has signed that it has really fulfilled, and the only one that has really mattered to the IMF. Among its peer countries — India, Bangladesh and Sri Lanka — Pakistan is the only one that is constantly trying to bring its primary balance into surplus. All the other countries have run persistent primary deficits since 1990, and in India’s case, those deficits are twice as large as Pakistan’s on many occasions (when seen as a percentage of GDP). There is only one year in the past three decades when India has seen a surplus in its primary account. It’s the same with the other two countries.

The experience of Pakistan’s neighbours is living proof that deficits are not, by themselves, a bad thing. India, Bangladesh and Sri Lanka have run persistent primary deficits, and my guess is that this is how they have financed their investments that have transformed their countries in their respective ways. Bangladesh has emerged as a powerhouse in export transformation over these decades. Sri Lanka has been the poster child of human development throughout this period. India has been a powerhouse growth economy, transforming its industrial base, its export composition and multiplying the drivers of dynamism within its own economy.

How has Pakistan emerged in the same period of time? Aside from cultivating our nuisance value in the region, there is no meaningful transformation for which Pakistan can be invoked as the example in this period of time. One reason is that we have never been able to focus on economic transformation internally, and so have always been forced to see deficits as a bad thing. But if done right, today’s deficits are an investment in tomorrow’s prosperity.