July-Sept current account gap, balance of payments weaken

KARACHI: The country’s key external parameters weakened in the first quarter of the current fiscal year on higher imports and dollar outflows, pushing the current account deficit wider and balance of payments into the red, State Bank of Pakistan (SBP) data showed.

The current account deficit stood at $3.4 billion in July-September quarter, compared with $865 million surplus in the same quarter a year ago on the back of widening trade deficit worth $11.66 billion.

Balance of payments, which represents the difference between current account and capital account, slipped into a deficit of $175 million in the September.

In September, the current account posted a deficit of $1.113 billion compared to surplus of $27 million in the corresponding month of the last fiscal year.

The SBP data showed deficit in September had narrowed slightly compared $1.413 billion deficit in the month of August.

The surge comes amid a booming demand, which is drawing in imports, while this gap could widen further in months ahead as high oil and commodities prices are also expected to keep the current account under pressure and weaken the rupee exchange rate, which was one of the worst performer in Asia this year dented by a surge in oil prices.

The SBP said the current account narrowed to $1.11billion in September from $1.47 billion in August. “A strong rebound in economic activity and higher international commodity prices kept the current account deficit at an elevated level of $3.4 billion in Q1-FY22,” the central bank said in its twitter handle.

Analysts said they expect a much higher deficit in the current fiscal year.

“We now expect current account deficit in the range of $10-11 billion (3.0-3.5 percent of GDP) in FY22 compared to our earlier estimate of $7-8 billion for the year,” analyst Syed Atif Zafar at Topline Securities said.

During the last five years (FY17-21) and 10 years (FY12-FY21), the current account deficit has averaged at $10.2 billion (3.5 percent of GDP) and $6.9 billion (2.7 percent of GDP) annually, respectively.

Ballooning trade deficit is contributing mainly in the widening current account deficit. In the first quarter of this fiscal, the trade deficit in goods almost doubled as it came to $10.23 billion in the quarter under review compared to 5.283 billion in the same quarter of the previous year.

The trade deficit of services also registered 100 percent growth to $10.949 billion in July-September of this fiscal compared to $5.816 billion of the corresponding quarter last financial year.

In the face of higher trade and current account deficits, the balance of payments has been receiving some respite from growth in remittances, which were rising continuously.

The country received $8 billion remittances in the first quarter of financial year 2021-22, posting a growth of 12.5 percent over the same quarter of the last fiscal.

“We have also tweaked up our remittances estimate to $29 billion for FY22 from our earlier projection of $28 billion,” Zafar added.

The rise in the current account deficit was putting pressure on the exchange rate. The rupee depreciated massively against US dollar in the recent weeks by crossing the limit of Rs173.

Zafar foresees dollar-rupee parity to remain between 175 and 178 by June 2022.

“The local currency might find some support as imports eventually slow down on the back of recent deprecation of rupee amidst a market driven exchange rate regime, resumption of International Monetary Fund programme, and expected monetary and fiscal tightening,” he added.