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September 24, 2020

Pakistan posts current account surplus of $805mln in July-August

Business

September 24, 2020

KARACHI: Pakistan posted a current account surplus of $805 million in the first two months of the current fiscal year compared with a deficit of $1.2 billion in the corresponding period last year, the central bank data showed on Wednesday.

The surplus was equivalent to 1.8 percent of gross domestic product. The country recorded a current account surplus of $297 million in August – second month in a row. In July, the current account surplus amounted to $508 million. However, Pakistan ran a deficit of $601 million in August last year.

Analysts said the July-August current account surplus was mainly due to increased remittances from Pakistanis working abroad and falling import payments. A flexible exchange rate also contributed to an improvement in the current account balance, they said. “The current monetary policy stance should encourage economic activity, which could cause imports to rise again and adversely affect current account balance,” said Zeeshan Afzal, an economist at Foundation Securities. However, exports of goods declined during the period under review. Figures issued by the State Bank of Pakistan further showed that exports of goods fell 16.6 percent to $3.4 billion in July-August FY2021, while imports dropped 12.6 percent to $6.7 billion.

Remittances increased 31 percent to $4.8 billion in the two months of this fiscal year.

The SBP expects Pakistan’s current account deficit to remain at around 2 percent of GDP in FY2021. The expected private and official flows should continue to keep Pakistan’s external position stable, it noted. However, analysts believe the revival in the economic growth to reverse improvement in the balance of payments in coming months. The external account, according to analysts, looks stable due to improved export outlook and non-debt foreign flows if Pakistan is removed from the Financial Action Task Force. The SBP’s foreign exchange reserves restored to their pre-pandemic level of around $12.8 billion. The reserves are adequate to cover three months of imports. Analysts said the economy is slowing down, which has reduced imports in July-August period. Moreover, a decrease in exports also highlighted the hit to external demand from the coronavirus pandemic. However, the official figures revealed that domestic demand picked up pace as cement, electricity and petroleum products’ sales are showing positive growth.

Analysts agreed that a status quo maintained by the SBP in the latest monetary policy would support the economic recovery.

The SBP expects the economic growth rate to recover slightly above 2 percent in FY2021 after falling to negative 0.4 percent last year. However, at the same time it sees the second wave of coronavirus as a major downside risk to this projection.

“Risks include a potential second wave of COVID-19 domestic infections, a possible sharp increase in infections in the winter months in Pakistan’s major export markets in Europe and the US, and the threat to agriculture from locust attacks,” it said in a monetary policy statement. “On the upside, a faster global recovery could lift exports higher.”