Current account deficit narrows 29.27pc in July-May

KARACHI: Current account deficit sharply narrowed 29.3 percent, coming down to 4.8 percent of GDP in the first 11 months of the current fiscal year from 6.2 percent in the corresponding period a year earlier, as reduction in trade gap and foreign inflows are seen alleviating the external finance risks.

The State Bank of Pakistan’s (SBP) data showed on Wednesday that current account deficit amounted to $12.678 billion in the July-May period of FY2019 compared to $17.926 billion in the corresponding period a year earlier.

The contraction in the deficit was mainly led by lower trade gap in goods and services. The trade deficit shrank 13.62 percent to $29.207 billion as imports slowed down on regulatory duties and rupee devaluation.

In July-May, imports of goods fell to $48.450 billion from $51.467 billion in the corresponding period a year ago, according to the SBP’s data. Exports, however, slightly rose to $22.340 billion from $22.754 billion. The narrowing trade gap was aided by healthy growth in workers’ remittances. Remittance flows rose 10.42 percent to $20.190 billion in the July-May period.

In May, current account deficit decreased 47 percent year-on-year and 12 percent month-on-month to $1.089 billion.

Weak currency and economic slowdown due to stabilisation measures curtailed imports. The government took series of measures to curb unnecessary imports. Furthermore, monetary tightening as well as cut in spending helped in lowering the current account deficit.

Considering positive vibes from the external sector, the government set a current account deficit target of 2.4 percent of GDP for the next fiscal year. The International Monetary Fund (IMF) is likely to finalise $6 billion loan agreement deal with Pakistan at its board's meeting scheduled on July 3. It will pave the way for loan agreements of $3 billion with the Asian Development Bank and $2 billion with the World Bank and Islamic Development Bank by next month. Three years oil differed payment deal of $9 billion from Saudi Arab would commence from July 1. Altogether, foreign financial assistance agreements of $12 billion are likely to be finalised within next three months.

Global ratings agency Fitch, however, sees external financing risks to stay for the country if the implementation of IMF reforms stalls.

“Recent policy actions, including an agreement with IMF staff on a forthcoming program, should ease external finance risks, but reserve levels will take time to rise and the program will face significant implementation risks,” Fitch Ratings said in a statement last week.

The SBP believed that the country has seen a substantial decline in the deficit following recent bouts of currency depreciation. The rupee has fallen about 10 percent this year. It declined by 38 percent in 2018.

SBP Governor Reza Baqir told earlier this week that the country started getting benefits from currency devaluation in form of increase in export volumes. Further, imports are down which eventually promotes import substitution. Baqir, however, said ease of doing business is as important to increase exports.