Current account deficit soars


Pakistan’s current account deficit – the gap between the country’s foreign expenditures and income – soared to $17.40 billion in the previous fiscal year ended June 30, 2022 mainly due to swelling imports and higher global commodity prices.

The current account deficit (CAD) spiked six times (or up $14.59 billion) in fiscal year 2021-22 compared to $2.82 billion in the prior fiscal year, Pakistan’s central bank reported on Wednesday.

Pakistan’s CAD widened to a record high at $19.20 billion in FY18. After a gap of four years, the deficit once again surged in FY22 and reached $17.40 billion, the second highest level in the country’s history.

In June alone, the CAD soared to a five-month high at $2.30 billion. It was 59% higher compared to the previous month and 40% more than the same month of previous year.

“As foreshadowed by earlier PBS (Pakistan Bureau of Statistics) data, a surge in oil imports saw CAD rise to $2.3 billion in June despite higher exports and remittances,” the State Bank of Pakistan (SBP) said on its official Twitter handle.

Pakistan imported 3.3 million tons of oil in June, which was 33% higher compared to May. “Together with higher global prices, this more than doubled the oil import bill from $1.4 billion (in May) to $2.9 billion (in June). By contrast, non-oil imports ticked down,”
it said.

“So far in July, oil imports are much lower and the deficit is expected to resume its moderating trajectory.”

Pak-Kuwait Investment Company Head of Research Samiullah Tariq said “this was the highest-ever energy import bill in June. Accordingly, the overall import bill also hit a record high at over $7 billion in the month as per the central bank data, which caused a sharp rise in CAD.”

Arif Habib Limited (AHL) Head of Research Tahir Abbas said that a sharp increase in import of services, in addition to a record high energy import bill, also played a big role in widening the CAD in June and during the entire FY22.

“The resumption of Hajj and Umrah this year and other international travel doubled the services trade deficit to $5.18 billion in FY22 compared to $2.50 billion last year,” he said.

Abbas pointed out that higher energy and food prices in global markets, import of Covid-19 vaccines worth around $4 billion, and plant and machinery imports worth around $2-2.5 billion under the subsidised TERF (Temporary Economic Refinance Facility) took the full-year CAD to the second highest level at $17.40 billion in FY22.

He projected that the current account balance may turn around and show a surplus in July 2022 and fall significantly to $6-8 billion in fiscal year 2023 after the government took a number of measures to cool down the overheated economy.

He recalled that Finance Minister Miftah Ismail had reported imports worth $3.80 billion in the first 25 days of July 2022. This may surge to $4.8 billion in the full month. Therefore, the estimated imports for the month are significantly lower compared to over $7 billion in June (as per SBP data) and $7.70 billion (as per PBS data).

“The reduced import payments and steady export earnings and workers’ remittance inflows would help turn the balance of the current account in to surplus in July,” he said.

The current account deficit may remain significantly low throughout FY23 following an expected drop in oil price in global markets. Accordingly, Pakistan’s energy import bill is estimated to reduce by $2-2.5 billion
in FY23.

Secondly, the import of Covid-19 vaccines may reduce significantly by $2.5-3 billion over the year.

Thirdly, the one-time subsidised loan scheme for the import of plants and machinery for industrialisation – TERF – has come to the end. So, these imports would cut down by $2-2.5 billion in the year.

Besides, the measures taken by the government and the central bank to cut imports including the imposition of new taxes and an increase in rate of previous taxes would additionally cut imports by another $2.5-3 billion in FY23, he estimated.

Other domestic and global brokerage houses, however, estimated a current account deficit (CAD) in the range of $10-15 billion in FY23.

“The automobile imports have fallen to zero these days in the aftermath of the government measures to cut down high imports,” he said.

PKIC estimated full-year CAD in the range of $10-12 billion. JS Research projected it at around $14 billion considering the global commodity prices would remain stable at around current levels. Fitch Ratings anticipated CAD at $10 billion for FY23.

“The expected cuts in imports, however, would slow down economic growth to a mere 2-2.5% in FY23,” Abbas said, adding the country’s industries heavily rely on imports.

The government has set an economic growth target of 5% for the year. The central bank foresaw growth in the range of 3-4% in the year.

The export earnings and workers’ remittances may remain steady amid the global recession. The slowdown in imports should help control high inflation in the country as well, he said.

Published in The Express Tribune, July 28th, 2022.

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