Pakistan’s current-account debt the gap between the country’s higher foreign expenditure and low income narrowed down significantly by 45% to $1.21 billion in July compared to $2.18 billion in June.
A meaningful cut in imports, mainly in energy products, helped contain the current-account deficit on a monthly basis after the government and the Central Bank kept a high check on imports to efficiently use the critically low foreign exchange reserves ahead of the IMF officially resuming its $7billion loan program early next week, August 29.
The reduced current-account deficit stands positive to stabilize the dwindling foreign exchange reserves standing at a critically low level, of less than six-week import cover, at $7.89 billion and supporting the rupee against the US dollar. Prolonged administrative control over imports may, however, hurt economic activities and increase unemployment in the country. State Bank of Pakistan (SBP) said on its official Twitter handle, “The current-account deficit shrank to $1.2 billion in July from $2.2 billion in June, largely reflecting a sharp decline in energy imports and a continued moderation in other imports.”
According to Central Bank data, “The narrower deficit is the result of wide-ranging measures taken in recent months to moderate growth and contain imports, including tight monetary policy, fiscal consolidation and some temporary administrative measures.” The current-account deficit at $1.21 billion in July, however, came 42% higher compared to $851 million recorded in the same month of July of last year.
Moreover, the deficit in July 2022 came notably higher than anticipated in recent weeks. Many financial experts had expected the balance of the current account to nominally in surplus or mildly in deficit in the month. The pending import payments, mostly for petroleum products, took the deficit to the higher side and surprised the market.
“SBP has reported energy import payment of $2.3 billion in July compared to actual import of energy worth $1.3 billion in the month,” Arif Habib Limited, Head of Research Tahir Abbas said Inflows on account of export earnings and workers’ remittances also slowed down in July which caused a higher current-account deficit.
SBP has reported a trade (import and export) deficit higher by $400 million than the one reported by the Pakistan Bureau of Statistics (PBS) for July. PBS records trade numbers as per Customs clearance on ports, while SBP records numbers as per import and export payments which are made with a leg.
Ismail Iqbal Securities, Head of Research Fahad Rauf anticipated the current account deficit would continue to fall in the months to come amid administrative checks on imports. “The current-account deficit is estimated to record at less than $1 billion in August and September provided the Central Bank continues to keep a vigilant eye on imports till September 2022,” he said. The Central Bank may extend the mandatory requirement for traders to acquire its approval before placing an import order (opening letter of credit or L/C) till December 2022, he expected.
“The extended administrative control over the imports may, however, hurt economic activities and increase the rate of unemployment in the country,” he said. Besides, improvement in export earnings and stabilization in workers’ remittances may become a challenge for economic managers in the wake of projected recession in Europe and high inflation readings in the US. The Central Bank has projected a current-account deficit at 3% of GDP ($10-12 billion) for the full current fiscal year 2023, he recalled.
Abbas, however, estimated the full-year current-account deficit at around $9 billion for the fiscal year of 2023. He said the ongoing ease in global commodity prices mainly in energy products, a significant cut in import of Covid-19 vaccine, the end of subsidized loan program for import of plants and machinery for industrialization, and administrative control over imports would help contain the current-account deficit beyond the Central Bank expectations.
Pakistan’s Central Bank reported the current-account deficit data much before the foreign currency exchange market resumed trade on Wednesday. The rupee, however, came down on the third consecutive working day, as it reduced by 0.37% (orRs0.72) on a day-to-day basis to close at Rs218.38 against the US dollar in the inter-bank currency market. Abbas said, “The domestic currency has maintained a downturn after the Central Bank reported a higher current account deficit than market expectations.”
