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July 18, 2019

C/A deficit narrows 32pc to $13.5bln in FY19

Business

July 18, 2019

KARACHI: Current account deficit significantly narrowed 32 percent to $13.587 billion in the last fiscal year of 2018/19 as the government’s stabilisation measures led to improvement in trade balance, while healthy growth in remittances lent an additional support to the external account.

The State Bank of Pakistan’s (SBP) data on Wednesday showed that current account deficit amounted to $19.897 billion in the preceding fiscal year.

Current account deficit sharply shrank to $995 million in June from $1.971 billion in the same month a year earlier and $1.003 billion in May. In terms of GDP, the annual current account deficit came at 4.8 percent – almost within the SBP’s projection of 4.5-5.5 percent – as opposed to 6.3 percent a year earlier.

Slowdown in non-oil import payments mainly helped in bridging the trade gap, slashing the deficit by 15.3 percent in FY2019. Imports declined 7.3 percent to $52.436 billion. Exports, however, remained stagnant at $24.217 billion compared with $24.768 billion, according to the SBP’s data.

Remittances continued to grow during the last fiscal year as overseas Pakistanis sent $21.841 billion, up 9.68 percent year-over-year.

Macroeconomic adjustments, especially the currency depreciation and tight monetary policy, led to decline in the current account deficit. Real effective exchange rate depreciated 19 percent during the last fiscal year, while the central bank raised its policy rate by 750 basis points to 13.25 percent since January 2018.

The central bank believed that fundamental adjustments have been made on the exchange rate front and now it depends on sentiments about rupee, which may take some time to improve.

The International Monetary Fund (IMF) projected the country’s current account deficit at 2.6 percent of GDP in the current fiscal year. Pakistan this month agreed to six billion dollars IMF’s loan program to support its balance of payments position.

The SBP’s foreign exchange reserves rose to about $8 billion on July 12, 2019 with the disbursement of the first tranche of the IMF’s three years extended fund facility. Reserves are expected to rise further on account of additional financial inflows – estimated at $38 billion – from other international creditors.

The government is also expecting further reduction in current account deficit on better export performance, containment of import payments and continued momentum in workers’ remittances.

The SBP, in a latest report, warned of downside risks stemming from slowdown in global economy on escalated trade war between US-China and uncertainty in Europe. Falling foreign direct investment that plunged 50 percent to $1.737 billion last fiscal year is hurting the external account. “A lot will depend on dollar inflows,” brokerage Topline Securities said in a report.

“We should keep an eye on dollar carry trades, Eurobonds and privatisation in the short run. This is important because Pakistan needs to fulfill IMF program criteria where the SBP has to increase gross international reserves to $11.2 billion by the end of Jun 2020.”

Pakistan has to show quarterly performance criteria related to net international reserves under the IMF program whereby SBP has to bring down net international reserves to $16 billion by December 2019 from negative $18 billion.

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