Current account deficit shrinks to smallest in 23 months in Feb

By Erum Zaidi
March 21, 2023

KARACHI: Pakistan’s current account deficit dipped to a near two-year low in February as the administrative controls and depreciation of rupee reduced imports, data from the State Bank of Pakistan (SBP) showed on Monday.


The current account deficit narrowed 86 percent to $74 million in February, the smallest since March 2021. It dropped by 68 percent month-on-month in February. The deficit shrank 68 percent to $3.9 billion in the eight months of the current fiscal year.

This fell in line with the expectations of analysts. Weaker currency, import restrictions, and curbs on the availability of foreign exchange, along with fiscal tightening, higher interest rates, and energy conservation measures, have all contributed to the reduction in the current account deficit.

Imports fell 22 percent to $3.931 billion in February from $5.039 billion a month ago. The country’s import bill declined 21 percent to $37.388 billion in July-February FY2023. Experts blame currency depreciation for the drop in imports. The government removed the artificial exchange rate cap in late January as it undertook the fiscal reforms necessary to unlock funds from an International Monetary Fund bailout. Pakistani expatriates working abroad were encouraged to transfer money home through official channels as a result of the local currency’s depreciation versus the US dollar.

“Falling imports due to weak currency and restrictions on LC (letters of credit) opening helped current account. Moreover, after fall in PKR last month remittances are gradually back to banking channels,” said Mohammad Sohail, CEO of Topline Securities.

The concerning development was a decline in exports because administrative constraints were only temporarily responsible for the drop in imports. Exports fell 24 percent year-on-year to $2.198 billion in February. During July-February FY2023, the exports decreased 10 percent to $18.639 billion.

Remittance inflows improved 5 percent month-on-month to $2 billion in February. However, the remittances fell by 9.5 percent year-on-year in February. During the eight months of the current fiscal year, the country received $18 billion in remittances, which is a 10.8 percent decrease from the same period last year.

Latest current account numbers come as the country is facing a delay in a bailout deal with the IMF. Without an IMF agreement, the sovereign default is imminent. The ongoing political and economic unrest could make it difficult to get funds from the IMF. It is essential for Pakistan to get a staff level agreement with the IMF in order to obtain a $1.2 billion tranche and unlock further inflows from other international creditors.

The final barrier to reaching an IMF agreement, according to Pakistan's Finance Minister Ishaq Dar, was an assurance from “friendly countries” to finance a balance of payment gap. “The CAD (current account deficit) is not much of a problem now but debt repayments are the real challenge faced by the country,” said Fahad Rauf, head of research at Ismail Iqbal Securities.

External public-debt maturities in the remainder of the fiscal year ending June 2023 amount to over $7 billion and will remain high in FY2024, according to a Fitch report published last month.

China recently refinanced commercial loans to prevent Islamabad from defaulting. But, the government is still awaiting the rollover of a $2 billion Chinese deposit that will mature on March 23 and a $1 billion deposit that will mature in June.

Beijing has agreed to refinance the $2 billion in foreign commercial loans and has already transferred $1.7 billion in the accounts of the central bank. The foreign exchange reserves held by the SBP as of March 10 were $4.319 billion, which is still alarmingly low, but adequate to escape default thanks to the Chinese inflows.