Reuters archive photo.
KARACHI: Pakistan’s current account deficit – the difference between state expenditure and income – jumped to $ 572 million in April 2020 but has remained largely under control and is affordable on the back of the country’s recent growth in foreign currency reserves.
The current account deficit jumped 64-fold in April compared to $ 9 million the previous March, the State Bank of Pakistan (SBP) reported.
The reason for comparing month-to-month figures rather than year-on-year “is to examine the impact of the coronavirus pandemic on the economy”, BMA Capital Executive Director Saad Hashmi said when speaking with The Express Tribune.
“The impact of Covid-19 will determine the direction of the national economy, especially in relation to exports and remittances of workers, going forward,” he said.
Causes of spikes
Arif Habib Limited (AHL) Director Ahsan Mehanti said the significant decline in exports mainly caused a widening current account deficit in April. Goods exports fell a quarter to $ 1.39 billion in April compared with $ 1.82 billion in March, according to the central bank.
In addition, a 5% slowdown in remittances also contributed to the widening of the external deficit. However, the decline in nominal imports helped contain the deficit, Mehanti said.
Hashmi said the April deficit was close to market expectations and was at an affordable level. “Deficits in the range of $ 500-600 million a month can still be borne,” he said.
Cumulatively, in the first 10 months (July-Apr) of the current fiscal year ending June 30, the current account deficit reached $ 3.34 billion compared to the revised estimate of the $ 4.5 billion International Monetary Fund for the full year (July-June), she says.
IMF projections are likely to be achieved if the deficit continues to last around $ 500-600 million per month in the last two months of the coming fiscal year, he said.
If the deficit remains within the projected limit, it must keep the rupee-dollar parity stable around the current Rs160 level to one dollar, he said.
The country’s recent increase in foreign exchange reserves above $ 12 billion will help manage the current account deficit. The increase came after the IMF last month provided an emergency loan of around $ 1.5 billion to fight Covid-19.
Reserves remain stable considering that the G20 countries can delay payment of foreign debt for the period May to December 2020 due to the global crisis. The Paris Club is also considering equal assistance to economically weak countries.
The deficit increases every year
On a year-on-year basis, the deficit narrowed by 51% to $ 572 million in April 2020 compared to $ 1.17 billion in the same month last year.
Cumulatively, in the first 10 months of FY20, the deficit dropped 71% to $ 3.34 billion compared to $ 11.45 billion in the same period last year, the central bank said. The contraction in imports mainly helped to overcome the deficit.
Goods imports shrank 17% to $ 36.09 billion in the first 10 months of FY20 compared to $ 43.47 billion in the same period last year.
Unfortunately, goods exports fell 2.38% to $ 19.65 billion compared with $ 20.13 billion.
Fortunately, worker remittances increased by 5.5% to $ 18.78 billion compared to $ 17.80 billion.
Hashmi said an increase in export earnings and remittances of workers remained a necessity, but at the same time remained challenging given the recession in the global economy because the health crisis had not yet seen an end.
Overall aggregate demand has declined and massive layoffs are seen in the global economy.
However, Pakistan’s largest single export revenue sector; TPT reports receipt of new export orders. The order includes protective clothing for doctors and paramedical staff and other matters relating to hospitals. “This may be the result of the ongoing US-China trade war,” he added.
Orders may not be enough to offset the full impact of Covid-19 on the domestic economy.
Export orders for textiles and other commodities could increase if “we managed to control Covid-19 efficiently in Pakistan,” he said.
The IMF has projected a current account deficit of $ 6.6 billion for the next fiscal year starting July 1.
Published in The Express Tribune, May 22nd, 2020.
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