It's not naive. Here is a rough calculation:
Total external income of Pakistan: (exports + remittances + forex) = (20 + 20 + 10) = 50 billion USD
Total external expenses of Pakistan: (imports + debt repayments) = (50 + 10) = 60 billion USD
Difference = (Income - Expense) = (50 - 60) = -10 billion USD
So there you have it. You need 10 billion dollar new debt each year to balance the external account or go bankrupt. So you can either decrease import by 10 billion USD or increase exports by 10 billion USD to balance the external account without taking any new external debt.
@ziaulislam @Patriot forever
Bro the concept is right. (Forex in our case does not actually represent income, it's just a measure of difference in inflows and outflows in a given period of time, it's a primary indicator of liquidity in the system)
Basically it's our income vs our expenditure ( imports both in goods and services and a few other factors vs mainly exports both goods and services + remittances) which determines Current account surplus or deficit. The amount needed to keep the country running.
If it's in deficit that means either this amount is financed by forex reserves or external borrowing.
(Their is a cavet, decreasing imports and increasing exports both are interconnected, reducing imports beyond a certain point results in decreased exports. Imports have to carefully regulated to avoid in decrease in exports)
2nd reason for external borrowing is to pay off interest on cumulative debt and to pay off maturing principal amount.
3rd is developmental loans such as funding dams or other such projects, or in some instances local financial support (mostly this is not the case).
4th to subsidize currency. Pakistan was spending 500 million dollars every month, which ultimately we were borrowing. This is no longer he case as now to a great degree currency is market determined. In fact contrary to this we actually have SBP buying dollars from the market ( basically to protect the export orders in view of appreciating currency).
Reducing imports or increasing exports. Both of them will reduce CAD which means less borrowing. If we analyze the net increase in debt in the previous years especially in last 2 years of Plmn majority of it is incurred to finance CAD. This is contrast to this year as positive CAD so far which has resulted in our borrowing requirement limited to interest payment and developmental loans etc. Overall the rate of increase in debt has considerably slowed down this financial year.
One more very important point which we need to consider when comparing net increase in debt between 2 time periods is the change in forex reserves, to get the true picture.
For example if we are comparing Plmn last 2 years we need to take into account the considerable drain in forex, in contrast to pti first 2 years where their is a considerable increase in forex.
This is one of the most crucial factors in determining the overall macroeconomic stability as it directly corresponds with the liquidity. The access to foreign lenders.
If your base variables are unsustainable such as CAD, it directly affects the confidence of foreign lenders citing your ability to pay back. This results in credit crunch, when even your closest friends e.g China can be of little help and is not enough. Which is why you run to IMF again and again as basically it restores confidence of other lenders.
If you don't do that the alternate is default, we all have idea what happens when someone defaults.
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