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March 21, 2017



Current account deficit widens 120.50 percent to $5.473 billion

KARACHI: The country’s current account deficit more than doubled to $5.473 billion in the eight months of the current fiscal year of 2016/17, mostly on the back of high import growth and contraction in remittances, the central bank data showed on Monday.

The current account deficit was $2.482 billion in the same period a year ago. “The balance of payments figures are worrisome, as it recorded a whopping 120.50 percent year-on-year surge in July-February FY17, intensifying concerns that there will be a pressure on external account this year,” an analyst said.

“We signify a considerably weaker balance of payments than the last fiscal year.” However, the twice collation support fund (CSF) receipts provided a relief to the weakening balance of payments,” the analyst said.

The State Bank of Pakistan (SBP) reported that the current account deficit was equivalent to 2.6 percent of the gross domestic product, up from 1.3 percent during the corresponding period of the last fiscal year.

The latest balance of payment numbers might not be a shocking reading for many analysts. They had already predicted the current account gap to surpass $5 billion mark in the eight months of this fiscal year due to growing trade imbalances.

The exports fell 3.90 percent to $13.318 billion in July-February FY17, while imports jumped 16 percent to $33.520 billion. That took the total trade deficit to $20.202 billion for the eight months of this fiscal year, up from $15.039 billion in the corresponding period of July-February FY16.

The widening current account deficit was also driven by a rise in overall balance on trade and goods and services, which soared to $17.381 billion as compared to $13.937 billion last year.

Besides, the fall in workers’ remittances and a meager growth in foreign direct investment added to the current account deficit. Remittances flows declined 2.47 percent to register $12.363 billion in July-February FY17.

The country attracted $1.284 billion in foreign direct investment, showing a six percent increase over the same period of FY16. Most analysts, including the central bank, are expecting an increase in the current account deficit as imports continued to record high growth and
the hope for boost to exports from the fiscal package has dried.

Moreover, the rising external debt servicing obligations continued to put pressure on the foreign exchange reserves. Some economists foresee the FY17 current account deficit may exceed $6.7 billion.

Pakistan’s forex reserves increased $122 million to $22.274 billion as of March 10 due to $200 million received from the US under the head of coalition support fund, taking the total inflows to $500 million.

The CSF proceeds are crucial for reducing the current account deficit, but have been erratic in the last few years and with the Trump administration now in control, may be termed uncertain.

The current account deficit narrowed to $744 million in February as compared to $1.202 billion in the previous month. An analyst at Topline Research in his report issued last week noted the current account deficit in FY17 widens, but will remain manageable this year and next year.

“We are revising up our current account deficit forecast to $6.6 billion from the previous $4.7 billion.” “Given higher CAD, we are revising down our FY17 year-end forecast of foreign exchange reserves to $22-23 billion from the previous estimate of over $25 billion,” he said.

The report estimates goods exports to stand at $21.1 billion and the realisation of budgeted CSF inflows of $1.1 billion (received $500 million) should help alleviate some pressure on the external account.

Further, amnesty scheme for foreign ownership of assets could help realise around $1 billion. But analysts are unanimous that the government needs to focus on supply side efficiencies (for the external sector) and revenue generation (for fiscal management).