Current account deficit sharply widens to five percent of GDP in July-March

KARACHI: Current account deficit swelled to an eight-year high of five percent of the GDP in the first nine months of the fiscal year 2018 as the country’s foreign trade gap continued to expand, the central bank data showed on Thursday.

The State Bank of Pakistan’s (SBP) data showed that current account deficit widened 50.55 percent to $12.029 billion in the July-March period compared with the corresponding period of the last year, posing challenges to the government to replenish its fast depleting foreign currency reserves.

The current account gap, however, narrowed to $1.163 billion in March from $1.281 billion a month ago.

Government estimated current account deficit for the outgoing fiscal year at 4.4 percent or $13.7 billion, while it set an ambitious target of 3.8 percent or $12.5 billion for the next fiscal year.

Analysts believed that government needs another bailout package to avert balance of payments crisis.

Economist Ashfaque Khan expected current account deficit to reach $18 billion during the current fiscal year.

“The gap is exerting pressures on exchange rate as well as foreign reserves,” Khan said. “There are foreign sources other than IMF (International Monetary Fund) that should be tapped… like bonds and sukuks.”

Rupee came under pressure due to widening current account deficit. It lost 4.43 percent of value against the US dollar in a single day on March 20.

The SBP’s data showed that total imports rose 16.6 percent to $40.569 billion in July-March FY2018. Exports stood at $18.267 billion, up from 12 percent in the corresponding period of a year earlier. The country’s trade deficit climbed 17.30 percent to $27.299 billion in the nine months of this fiscal year, Pakistan Bureau of Statistics data showed.

Analysts said balance of payments position remained under pressure as imports of energy products and steel and textile inputs continued to go up. Rise in imports overshadowed a healthy turnaround in the foreign exchange receipts from exports, they added.

A slight growth in workers’ remittances and foreign direct investment during the period under review was insufficient to finance the huge external current account. Remittances from Pakistani workers abroad rose 3.55 percent to $14.606 billion in the nine months of the current fiscal year. Similarly, foreign direct investment was slightly up 4.4 percent to $2.094 billion.

SBP’s foreign exchange reserves fell to $11.602 billion in March from $12.227 billion in February.

Multilateral foreign lenders expressed concerns over the deteriorating balance of payments situation of Pakistan. The IMF clipped growth forecast to 4.7 percent for the next fiscal year partly due to external account vulnerabilities – some notches down as compared to a decade high growth of 5.3 percent achieved in FY2017 and 5.8 percent estimated in FY2018.

The SBP said risks to overall macroeconomic stability have increased due to widening external imbalances.

“Real sector of the economy is performing well, while the external account presents challenges,” the central bank said in a latest quarterly economic report.

The central bank is, however, a bit optimistic about exports sector’s recovery on the back of strong demand of merchandise in international markets, currency depreciation and tax incentives announced to encourage exporters.