Current account deficit widens to $773mln in July

KARACHI: Pakistan posted a current account deficit of $773 million in July compared to the surplus of $583 million a year ago, the central bank data showed on Friday based on higher trade deficit and fall in remittances.

With the domestic economy continuing to show substantial improvement, the trade gap swelled by 85.53 percent to $3.104 billion in July, Pakistan Bureau of Statistics reported early this month. The major reason behind the current account deficit was a surge in imports. Exports also increased, but that was offset by continued demand for imported goods.

Current account gap was pushed by the constantly growing import volume of energy and non-energy commodities, amid a rising trend in the global prices of oil, food, and metals, along with vaccine imports.

Demand for capital goods from the industry in the wake of significant borrowing under the Temporary Economic Refinance Facility has also contributed to the rise in imports.

Imports of goods rose by 51.7 percent to $5.936 billion. However, exports increased by 19.7 percent to $2.257 billion.

Remittances from Pakistanis working abroad fell 2.1 percent to $2.71 billion in July. On a positive note, the current account deficit narrowed by 52 percent on a month-on-month basis. The country had a deficit of $1.619 billion in June.

The MoM decrease in the current account deficit was on the back of falling imports and flat growth in remittances.

“This deficit is in line with SBP’s expectations of a current account deficit of 2-3 percent of GDP (gross domestic product) as economic activity continued to progress,” said the SBP’s tweet.

“Despite the recent increase in CAD, SBP’s foreign reserves position continued to strengthen on monthly basis. This is in contrast to past trends and is supported by country’s market-based exchange rate system.” Samiullah Tariq, the head of research at Pak-Kuwait Investment Company agrees with this statement.

“The parity (rupee/dollar) has adjusted with the rise in imports and current account deficit. Due to the flexible exchange rate adopted by the SBP foreign exchange position is strong and will strengthen with additional flows from the IMF (International Monetary Fund),” he said. “Though imports have increased, exports growth is promising.” Analysts expect the current account deficit to be in the range of 2.2-2.6 percent of GDP this fiscal year.

The country’s forex reserve position is expected to continue to improve this year due to the adequate availability of external financing. The gross external financing requirement is estimated at $21 billion, where available financing is estimated at $24 billion, including $2.8 billion from the IMF next week because of its new global special drawing rights allocation. Inflows from overseas Pakistanis through Roshan Digital Account crossed the $2 billion mark in 11 months. In its monetary policy document, the SBP expects that imports this year would be more skewed toward machinery rather than consumption compared to FY2017, with machinery imports projected to be better distributed across sectors than in FY2018, when power and telecommunications dominated.