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September 20, 2019

C/A deficit narrows 55pc in two months


September 20, 2019

KARACHI: Current account deficit sharply narrowed 54.6 percent to $1.292 billion in the first two months of the current fiscal year as completion of Chinese-funded early harvest projects, exchange rate adjustment and regulatory steps led to reduction in import bills during the period, the central bank’s data showed on Thursday.

The current account deficit represented 2.8 percent of gross domestic product in July-August, down from 5.5 percent of GDP in the same period a year earlier. The deficit amounted to $2.850 billion in the two months of FY2019.

In August, the deficit dropped to $614 million from $720 million in the corresponding month last year. The current account deficit stood at $678 million in July.

Regulatory and administrative measures, soft crude prices and completion of early-harvest projects under the China-Pakistan Economic Corridor framework helped in curtailing import bills. Merchandise imports dropped 23.4 percent year-on-year to $7.704 billion in the July-August period.

An analyst at Alfalah Securities said the country currently has non-oil surplus current account. Ex-finance minister Salman Shah said the balance of payments position would continue to improve “on the back of policies adopted by the government”.

“The current account deficit is actually expected to narrow further and reach at sustainable level because of sharp weakness in the rupee,” Shah added. “We see the current account deficit to be at $7-8 billion in FY2020.”

Merchandise exports could grow slightly during the two months despite the currency devaluation. In July-August, exports of goods rose 1.4 percent year-on-year to $4.142 billion.

The analyst said there was a double digit growth in volumetric exports. “However, total value is not reflective of the increase because of decline in unit prices,” the analyst said. “This phenomenon can be seen in other markets like, Vietnam, Turkey, Bangladesh, China and India as well.”

Shah said export could improve with smooth refund payments to the exporters and reduction in energy tariffs for the export sector. “The rupee is likely to remain stable or even appreciate due to slowdown in the current account gap,” he added.

Foreign direct investment, however, fell 58.4 percent to $156.7 million in the period under review. Workers’ remittances fell to $3.730 billion compared to $4.071 billion a year ago.

The decline in the current account, stability in the exchange rate, disbursement of International Monetary Fund’s program-related inflows and activation of the Saudi oil facility contributed towards building the central bank’s foreign exchange reserves. The SBP’s reserves stood at $8.60 billion as of September 13 compared to $7.280 billion at end-June FY19.

The SBP, in its latest monetary policy statement, said improvements in the balance of payments and market sentiment allowed it to reduce its forward short liability position and hence increase its net international reserves.

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