Current account deficit shrinks 75pc in H1 on weak imports

KARACHI: Current account deficit narrowed 75 percent to $2.153 billion in the first six months of the current fiscal year of 2020 as imports of goods declined sharply, the central bank data showed on Friday.

The current account deficit was around $8.614 billion in the corresponding period of last fiscal year. The current account deficit, which measures the flow of goods, services and investments into and out of the country, stood at $367 million in December, compared with $364 million in previous month.

Analysts said the decline in the current account deficit was driven by import compression and moderate growth in exports. Higher foreign investment and increased remittances from Pakistani workers abroad also contributed to the improvement in the current account balance.

Trade data, released earlier, showed exports increased 4.5 percent to $12.391billion in July-December FY20, while imports fell 20.9 percent to $22.2 billion in the six months of the current fiscal year.

The trade deficit is lower primarily because imports have fallen at a faster rate than exports due to weak manufacturing activity and lower imports of raw materials and capital goods,” said an analyst.

Foreign direct investment into Pakistan surged 68.3 percent to $1.340 billion in July-December FY20. Foreign investment in government securities such as market treasury bills and Pakistan Investment Bonds reached $452.2 million in six months of FY20, compared with $0.1 million a year ago.

“However, both the critical components of foreign exchange reserves, exports and FDI (foreign direct investment), have not shown any major improvement during the period,” the analyst added. But hot money and debt capital have increased significantly. This kind of improvement is not sustainable.”

Analysts said the current account gap is easily plugged by the available financial flows in the period under review after an increase in foreign portfolio investment and two tranches of IMF Extended Fund Facility.

The SBP, in its first quarterly report, expects the current account deficit to be 1.5 – 2.5 percent of GDP in FY20 largely due to increasing benefits from import compression. The report spells out in sharp detail the challenges being faced by the economy including mismatch related to exports quantum and earnings.

“Most of the improvement in the current account has come from a reduction in the country’s import bill; exports have yet to contribute significantly, as healthy quantum gains are not supported by price trends,” the report said.

“With the industrial sector under stress, its demand for imported raw material is expected to stay low. Commodity prices are also subdued, amid the slowdown in the world economy.”