C/A deficit widens 81 percent to $1.47bln in August

KARACHI: Pakistan’s current account deficit jumped 81 percent month-on-month in August as a strong demand spurred imports amid higher commodity prices, outpacing a recovery in exports.

The central bank’s data showed on Friday current account deficit (CAD) surged to $1.476 billion in August from $814 million in the previous month. It had posted a surplus of $255 million in August 2020.

This yawning was mainly due to higher trade deficit as imports continued to rise amid robust economic activity.

Imports increased 11 percent month-on-month (MoM) to $6.0 billion in August, while exports slightly increased four percent to $2.350 billion.

Analysts said the elevated shortfall in the current account was a potential source of vulnerability for the country’s economy and called for immediate measures to be taken by the government to discourage luxury imports by increasing duties and taxes on non-essential items.

“This $1.5 billion current account deficit is dangerous, but was expected after record imports in August. Not only global prices increasing, but demand is also rising in Pakistan. Urgently need fiscal and monetary steps to control this,” said Mohammed Sohail, CEO Topline Securities in a tweet.

However, State Bank of Pakistan (SBP) doesn’t see a large CAD as a risk as the available external financing will be sufficient to fund the deficit. The SBP’s foreign reserves rose to an all-time high of $20 billion, it said. The reserves seem enough to cover around four months of imports.

The country recorded a CAD of $2.290 billion in the first two months of the current fiscal year against an $838 million surplus in the same period in FY2021.

Goods imports advanced 67.8 percent to $11.406 billion in July-August FY2022. The high growth in imports is boosted by a spike in the global commodities and energy prices and the rising domestic demand.

The upsurge in demand is due to the sustained economic recovery. The government’s efforts to control fourth wave of coronavirus pandemic, accelerated pace of vaccination, and the SBP’s Economic Refinance Facility for businesses to spur investment activities and industralisation, suggest imports would continue to rise.

Exports of goods gained 35.4 percent to $4.601 billion.

The expectations for the interest rate hike are gaining momentum after the August current account figures are released.

Analysts anticipate the SBP can use monetary policy to curb imports by raising interest rates.

The high import bill also puts pressure on the rupee, which has depreciated four percent against the dollar since the last monetary policy was announced in July. The rupee devaluation is expected to fuel imported inflation.

The remittance inflows can see a slowdown as traveling to the Middle East resumes.

Analysts see a potential breach of the 2-3 percent of GDP current account deficit target range for FY2022.