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Current account deficit contracts 71pc in July-April

Business

May 22, 2020

KARACHI: Pakistan’s current account deficit sharply contracted 71 percent to $3.3 billion in the first 10 months of the current fiscal year as import reduction and stable foreign inflows strengthened the balance of payment position, the central bank’s data showed on Thursday.

The State Bank of Pakistan’s (SBP) data showed that current account deficit stood at $11.4 billion in the corresponding period a year earlier. The deficit represented 1.5 percent of gross domestic product, compared to 4.8 percent a year earlier.

Also, current account deficit continued to shrink at $572 million in April, compared to $1.2 billion in the corresponding month a year ago. However, the gap was much higher than $9 million in March.

Current account deficit is expected to be at $4 billion by the end of the current fiscal year, sharply lower than $13.4 billion reported last year. The contraction in the current account deficit was largely due to narrowing trade gap. Figures published by the Pakistan Bureau of Statistics showed that trade deficit narrowed 25.2 percent to $19.6 billion in the July-April FY2020, due to import reduction. Merchandise imports dropped 16.9 percent to $36.1 billion in the period under review, while exports decreased 2.4 percent to $19.7 billion, according to the SBP.

Hefty growth in foreign direct investment and single digit growth in remittances also supported the external current account. Foreign direct investment rose 127 percent to $2.3 billion in July-April FY2020, while workers’ remittances increased 5.51 percent to $18.8 billion.

Exports are expected to fall by $2.8 to $3.8 billion, while remittances are likely to remain around $20-21 billion in FY2020.

Government took a series of stabilisation measures under a three-year loan reforms program agreed last year with the International Monetary Fund. The steps resulted in curtailment of demand for a range of energy and non-energy products. Higher interest rates and imposition of regulatory duties on some raw materials and imported finished items also discouraged demand for such products. The SBP said remittances have remained resilient, but there are potential downside risks given the economic difficulties across the world, especially in oil exporting countries, due to the pandemic.

However, the SBP sees the outlook for external sector broadly stable, despite challenging global condition. “The current account deficit should remain bounded and the recent fall in portfolio inflows will be offset by official flows committed by the international community, such that Pakistan’s external position remains fully funded,” the SBP said in a recent monetary policy document. “Together, these developments, buttressed by the flexible exchange rate regime, should continue to support a steady build-up in the SBP’s foreign exchange reserve buffers.”