The current account deficit

The drop before the deluge? Or can the coming crisis be controlled?

That the current account surplus turned into a deficit in April was only to be expected, With the global price of oil going persistently upward, the surplus was bound to come under pressure. From a surplus of $H.134 billion in March, which was the highest in a year, the April current account showed a deficit of $324 million. That meant a cumulative change of $1.458 billion.  That rate of burning money cannot be sustained. One way of ending it is for oil prices to return to levels approaching the beginning of the conflict between Iran and the USA and Israel. The reopening of the Hormuz Strait is essential for that, and efforts have been renewed by mediating powers towards that end. However, for the present, US President Donald Trump has announced that the USA held off an impending attack because such powers as Saudi Arabia, Qatar and the UAE asked him to. The ceasefire was declared on April 8, and has been maintained ever since. (There have been violations, but the ceasefire continues in place.) Initially limited, after April 21, when it expired, Mr Trump declared that it would remain in place indefinitely, though that did not stop him from blockading Iranian ports.

The USA once again has found the Iranian proposal insufficient, and apparently hopes that its threat of devastation will force Iran to accept US Terms. It might be noted that pressure from affected countries, including Pakistan, is mounting on Iran to come to an agreement with the USA on reopening the Hormuz Strait. Apart from the diplomatic front, there is the possibility of increasing imports, but that will only work in the long run, because there is little chance of increasing imports at short notice. Going by the Real Effective Exchange Rate was 105.80 in April, compared to 105.17 in April, the rupee is over-valued, but only marginally.

Remittances continue to be strong, as do loans from International financial institutions, but there will be a limit as the import bill continues to rise. Even as the price of oil imports continues to rise, the reserves, built up at such great cost, are likely to fall beneath the safety level. There is the possibility, unlikely but not to be ruled out, of the USA launching a ground assault. That will raise the global oil price even further. Pakistan has already been stripped of its current account surplus; next its reserves will follow.