Current account deficit stands $4b higher than reported
Deficit squeezed due to exclusion of CPEC-related imports from the database
PHOTO: REUTERS
ISLAMABAD:
Pakistan’s publicly reported current account deficit and external debt and liabilities are understated by about $4 billion as the country has so far remained unable to record the cost of imports made under the China-Pakistan Economic Corridor (CPEC).
Payments for power and construction machinery and other related goods imported from China are not made through Pakistan’s banking channels, which has led to under-reporting of the external debt and current account deficit, said sources in the Ministry of Finance.
Global lender warns of risks to Pakistan’s economic stability
The State Bank of Pakistan (SBP) on Thursday reported that the country’s current account deficit - the gap between external payments and receipts - widened to $9 billion or 3.2% of gross domestic product (GDP) from July to May of the outgoing fiscal year.
However, this figure does not fully reflect the true picture as the central bank has recorded the trade deficit - gap between exports and imports - at only $22.7 billion. The trade deficit is a key component of the current account gap.
The central bank’s trade deficit figure was $7.3 billion lower than that reported by the Pakistan Bureau of Statistics (PBS). The PBS figure also included the cost of insurance and freight of imported goods, which, on average, was $1.3 billion.
By excluding the freight and insurance cost, the central bank’s trade deficit figure was lower by $6 billion compared to the PBS data.
The central bank put 11-month import bill at $42.5 billion, $6 billion lower than that reported by the PBS. Similarly, the SBP put exports at $19.8 billion in July-May FY17 against $18.5 billion reported by the PBS.
Consequently, the current account deficit of $9 billion is under-reported by $4 billion, meaning the gap has widened to $13 billion - the highest-ever in the country’s history.
Data regarding import of goods is compiled by both the PBS and SBP. The PBS compiles data from the Customs authorities that record imports when goods physically cross the country’s border. The SBP receives data from commercial banks when importers make payments against the letters of credit.
Cause of under-reporting
The main reason behind the understated figures was the exclusion of CPEC-related imports from the central bank database, said sources in the finance ministry.
They said since Pakistan-based banks were not opening letters of credit for import of machinery and other goods from China, the central bank could not record these transactions. Secondly, Chinese banks are directly making payments to Chinese suppliers of the goods.
“Pakistan’s external sector has already been in terrible situation and current developments show things have deteriorated beyond anybody’s expectations,” said Dr Ashfaque Hasan Khan, former economic adviser, Ministry of Finance.
The impact is not limited to only the current account deficit as external debt and liabilities also appear to be understated due to the same reasons. CPEC imports are largely made by taking Chinese loans, except for the equity component, estimated at around 30%.
For the first nine months of FY17, the central bank had put Pakistan’s total external debt and liabilities at $75.7 billion. By taking into account the impact of CPEC debt, the debt and liabilities have crossed $79 billion. The central bank has also acknowledged the under-reporting of the current account deficit due to CPEC imports.
In its second quarterly report, the central bank said “this difference indicates that capital equipment imports into the country, FDI and loans from China are not being fully captured in the BoP (balance of payments) data”.
Current account deficit widens 178%, stands at $8.93b
“It appears that the bulk of these machinery imports are being financed from outside the Pakistani banking channel,” it said.
The central bank said a large share of this discrepancy could be explained by the surge in import of power generation machinery, which was being recorded by the Customs, but was not fully visible in the import financing data available with the SBP.
The central bank stated that it was already in the process of reconciling these figures with the federal government. While this would inflate the trade and current account deficits, it would be netted out through an equal increase in loans and/or FDI, leaving zero net impact on the country’s reserves position, said the central bank.
Published in The Express Tribune, June 23rd, 2017.
Pakistan’s publicly reported current account deficit and external debt and liabilities are understated by about $4 billion as the country has so far remained unable to record the cost of imports made under the China-Pakistan Economic Corridor (CPEC).
Payments for power and construction machinery and other related goods imported from China are not made through Pakistan’s banking channels, which has led to under-reporting of the external debt and current account deficit, said sources in the Ministry of Finance.
Global lender warns of risks to Pakistan’s economic stability
The State Bank of Pakistan (SBP) on Thursday reported that the country’s current account deficit - the gap between external payments and receipts - widened to $9 billion or 3.2% of gross domestic product (GDP) from July to May of the outgoing fiscal year.
However, this figure does not fully reflect the true picture as the central bank has recorded the trade deficit - gap between exports and imports - at only $22.7 billion. The trade deficit is a key component of the current account gap.
The central bank’s trade deficit figure was $7.3 billion lower than that reported by the Pakistan Bureau of Statistics (PBS). The PBS figure also included the cost of insurance and freight of imported goods, which, on average, was $1.3 billion.
By excluding the freight and insurance cost, the central bank’s trade deficit figure was lower by $6 billion compared to the PBS data.
The central bank put 11-month import bill at $42.5 billion, $6 billion lower than that reported by the PBS. Similarly, the SBP put exports at $19.8 billion in July-May FY17 against $18.5 billion reported by the PBS.
Consequently, the current account deficit of $9 billion is under-reported by $4 billion, meaning the gap has widened to $13 billion - the highest-ever in the country’s history.
Data regarding import of goods is compiled by both the PBS and SBP. The PBS compiles data from the Customs authorities that record imports when goods physically cross the country’s border. The SBP receives data from commercial banks when importers make payments against the letters of credit.
Cause of under-reporting
The main reason behind the understated figures was the exclusion of CPEC-related imports from the central bank database, said sources in the finance ministry.
They said since Pakistan-based banks were not opening letters of credit for import of machinery and other goods from China, the central bank could not record these transactions. Secondly, Chinese banks are directly making payments to Chinese suppliers of the goods.
“Pakistan’s external sector has already been in terrible situation and current developments show things have deteriorated beyond anybody’s expectations,” said Dr Ashfaque Hasan Khan, former economic adviser, Ministry of Finance.
The impact is not limited to only the current account deficit as external debt and liabilities also appear to be understated due to the same reasons. CPEC imports are largely made by taking Chinese loans, except for the equity component, estimated at around 30%.
For the first nine months of FY17, the central bank had put Pakistan’s total external debt and liabilities at $75.7 billion. By taking into account the impact of CPEC debt, the debt and liabilities have crossed $79 billion. The central bank has also acknowledged the under-reporting of the current account deficit due to CPEC imports.
In its second quarterly report, the central bank said “this difference indicates that capital equipment imports into the country, FDI and loans from China are not being fully captured in the BoP (balance of payments) data”.
Current account deficit widens 178%, stands at $8.93b
“It appears that the bulk of these machinery imports are being financed from outside the Pakistani banking channel,” it said.
The central bank said a large share of this discrepancy could be explained by the surge in import of power generation machinery, which was being recorded by the Customs, but was not fully visible in the import financing data available with the SBP.
The central bank stated that it was already in the process of reconciling these figures with the federal government. While this would inflate the trade and current account deficits, it would be netted out through an equal increase in loans and/or FDI, leaving zero net impact on the country’s reserves position, said the central bank.
Published in The Express Tribune, June 23rd, 2017.