Current account deficit nearly doubles to $5.013bln in July-Oct

KARACHI: Current account deficit almost doubled in the July-October period of the current fiscal year, magnifying a challenge for government to reinvigorate exports and take measures for foreign exchange reserves’ buildup to avert a balance of payment crisis, analysts said on Monday.

The State Bank of Pakistan (SBP) recorded $5.013 billion of current account deficit in the first four months of FY2018 as compared to $2.259 billion in the corresponding period a year earlier.

In October, the current account deficit stood at $1.315 billion, up 19.87 percent over September. An analyst said the current account numbers as well as ongoing political turmoil pose a real risk of economic uncertainty to government.

“The government should take immediate measures to increase foreign financial inflows, especially timely launch of sovereign bonds at internal capital markets,” the analyst said, requesting anonymity. Government is set to raise two to three billion dollars through sukuk or Eurobonds.

Analysts are wary of the yield terms on which the funds would be raised. First Capital Equities Limited, in a report, said the country needs approximately seven billion dollars in net financing, assuming a three-month import cover.

“As five-year Eurobond yield currently stands at four versus 4.9 percent in November last year, we foresee the government partially raising these funds from international capital markets with the rest potentially being funded from the Chinese banks/multilateral agencies,” the brokerage added.

Analysts said the current account deficit is widening as growing imports offset rise in exports, increase in foreign direct investment and uptick in remittances. Trade deficit swelled to $12.107 billion in July-October FY2018 from $9.242 billion a year earlier, mostly due to a spike in imports of capital goods.

While exports increased 9.98 percent to $7.056 billion, imports sharply rose 22.38 percent to $19.163 billion. In July-October, workers’ remittances slightly increased 2.27 percent to $6.445 billion. But, foreign direct investment jumped 74.4 percent to $941 million during the period.

SBP projected current account deficit at 4 to 5 percent of GDP during the current fiscal year. The current account deficit swelled to $12.439 billion, equivalent to 4 percent of GDP in FY2017. It stood at 1.7 percent in FY2016.

Experts believe the trade deficit could reach much higher during FY2018 as the government bets on growth. Besides, imports of capital goods are needed for the ongoing infrastructure development activities under China-Pakistan Economic Corridor projects.

Analysts said the imposition of regulatory duties on import of 713 items seems to have proven ineffective in curtailing the country’s import bill as they are mainly on products consumed by high-income group.

Analysts warned that current account deficit indicates a strained balance of payment position with weakening foreign exchange reserves. The foreign exchange reserves held by SBP fell to $13.678 billion at the end of the week ended November 10.

At the same time, the government’s external debt servicing obligations also have gone up, casting doubt over how much longer the foreign exchange reserves could finance the current account shortfall.

Additionally, the inflows under the collation support funds have remained contained since the start of this fiscal year. Some analysts advocate a controlled currency depreciation of 3 to 5 percent in FY2018.

But, they said excessive depreciation will erode gains related to economic growth achieved in the past four years while its impact on exports would relatively be low. Foreign portfolio investors are also awaiting some rupee depreciation to turn on floodgate of funds to Pakistan’s equity market in the wake of the country’s upgrade to Morgan Stanley Capital International’s emerging market index.