Deficit: Good or Bad?

As Pakistan saw a safe transition of governments, the first thing that Finance Minister Ishaq Dar had on mind was the country’s current-account deficit. Current account deficits have always been viewed with an evil. It doesn’t need to be this way.

The major misconception that newspaper readers have about the current-account deficit is that it slows down economic growth. This isn't necessarily true. The deficit exist because a developing country is currently in need of expensive machinery which it is importing from abroad. The installation of this machinery would help the country increase its production and hence increase growth. Moreover, growing aggregate demand can also cause a current account deficit as the demand for imports rises. 

This argument should be rectified by saying that the higher the deficit goes as a percentage of the country's GDP, the lower will be growth of the country. Pakistan's current-account deficit is shown in the graph above (primary Y-axis inverted). It is interesting to note that the closest Pakistan came to achieving a surplus was in 2011 and even then it was around 1% of the GDP. 
As of now, the deficit stands at around 1% of GDP but the total value has increased to $4 billion. The appreciation of the rupee in the recent months has decreased exports and increased imports hence putting pressure on the current account balance.