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Friday March 29, 2024

Current account deficit narrows to $2.525 billion in 2015/16

By our correspondents
July 22, 2016

KARACHI: The country’s current account deficit slightly narrowed 6.79 percent to $2.525 billion in the last fiscal year of 2015/16, a little below than the central bank’s target for the period. 

The State Bank of Pakistan (SBP) data showed on Thursday that the current account deficit amounted to $2.709 billion in the preceding fiscal year of 2014/15.  The current account deficit stood at 0.9 percent of gross domestic product in 2015/16 as against 1.0 percent of GDP in 2014/15.

In June, the current account posted a shortfall of $61 million, which was much smaller than the deficit of $729 million recorded in the previous month. It amounted to $343 million in June 2015.  

Analysts said the country managed to narrow the current account deficit, which was a little less than what was projected by the central bank ($2.9 billion) for the last fiscal year. They said it was the full-year effect of lower oil prices. The slight increase in remittances and foreign direct investment were also the factors.

“But, the improvement was relatively limited and it looks more likely that the current account balance to face pressure this fiscal, following the completion of IMF (International Monetary Fund) programme in September,” said an analyst.  

The country received inflows of $4.1 billion as foreign loans during the last fiscal year, highest since 2007/08.  “The country’s balance of payment is likely to face pressure when external debt servicing to Paris Club and other international lenders will be started in 2017 onwards,” said an analyst.

Total exports of goods and services stood at $27.469 billion in FY16 as compared to $29.969 billion in FY15. Imports of goods and services amounted to $48.343 billion compared with $50.123 billion.  

Non-oil imports considerably increased during July-May 2015/16 with a huge rise of 132.87 percent in imports of raw cotton to $717 million. Exports faced a continuous decline during FY16 due to sluggish demand in export destinations, low unit price and high cost of production.

“Any exogenous shock leading to higher commodity prices (emanating from geo-political risks) will naturally inflate our import bill, before (and probably more than) it benefits our exports,” the SBP said in its third quarter report. 

The forex reserves held by the SBP stood at $18.007 as of July 21. This amount is sufficient to finance more than four months of the country’s import bill, and more than twice the short-term payments.

Import growth is likely to gain further momentum due to China-Pakistan Economic Corridor projects. But, analysts said its impact on country’s external account would largely remain contained due to the expected funding from China.

The country fetched $1.282 billion in foreign direct investment during the last fiscal year and almost half of it from China.    Remittances rose to $19.915 billion in FY16 as against $18.721 billion in FY15.

“While remittances continue to provide a much-needed buffer, the continued moderation in these flows means that payment pressure will switch back to the financial account,” said the SBP’s report.