Thursday January 20, 2022

October current account deficit widens sharply on higher imports

November 20, 2021

KARACHI: Pakistan's October current account deficit widened sharply from a year earlier, driven by higher imports, data from the State Bank of Pakistan showed on Friday.

The deficit widened to $1.66 billion in October from surplus of $448 million a year ago, when the coronavirus pandemic was taking a heavy toll on the economy and imports ground to a virtual halt. The current account deficit widened 46 percent month-on-month in October. The country posted a current account gap of $1.13 billion in the previous month.

The reason behind the deficit was 73.3 percent year-on-year rise in imports to $6.034 billion in October. However, exports of goods also increased by 24 percent to $2.448 billion and remittances rose by 10 percent to $2.518 billion.

The month-on-month increase in the current account gap was driven by a decline in exports and remittances, while uptick in services imports also led to the rise in the current account shortfall. Exports fell by 7.1 percent and remittances dropped 5.7 percent on a month-on-month basis in October.

Analysts said high international commodity prices and strong domestic activity kept the current account deficit elevated.

The country recorded a current account deficit of $5.1 billion in the first four months of the current fiscal year against a $1.313 billion surplus in the same period in FY2021. The increasing imports also puts pressure on the rupee, which had depreciated almost 11 percent against the dollar so far this fiscal year. The rupee devaluation is also fueling imported inflation. The high current account deficit has become a major worry for the government as it is making the country's foreign exchange reserves vulnerable. The forex reserves held by the State Bank of Pakistan fell by 381 million to $16.945 billion as of November 12.

Analysts expect the current account gap to widen to $11-13 billion and the total funding requirement to be $24 billion during the current fiscal year and "a book balancing would be largely depend on the revival of the IMF programme which would unlock other multinational flows, eurobond issuances, debt rollovers and international commercial bank borrowings".

The SBP, in its latest monetary policy statement, expects the current account deficit for FY2022 to modestly exceed the previous forecast of 2-3 percent of GDP. The SBP has recently taken some steps to lower aggregate demand, which would help control imports and current account deficit.

The central bank increased the cash reserves requirement maintained during a period of two weeks by scheduled banks from 5 percent to 6 percent and minimum CRR to be maintained each day from 3 percent to 4 percent. It has also taken measures to curb undesirable foreign currency outflow, imposed 100 percent cash margin requirement on import of certain products and stringent regulations on auto financing. In a fresh move, the SBP raised interest rates to 8.75 percent from 7.25 percent amid heightened concerns about inflation as well as the balance of payments.