Current account deficit widened 37% in Dec 2018

It is likely to push policymakers to raise interest rate, let the rupee depreciate more

KARACHI: The current account deficit - which remained the biggest challenge for Pakistan over the past more than two years - again sparked concern as it widened 37% to $1.66 billion in December 2018, according to figures released by the State Bank of Pakistan (SBP) on Thursday.

The notably high deficit - the difference between the country’s high foreign expenditure and low income - is expected to push policymakers to further increase the key interest rate and let the rupee lose more value, a brokerage house commented in its report.

The deficit soared mainly on the back of unwanted growth in imports and less-than-desired rise in exports. Besides, the worker remittances - on which most of the economic managers were relying to rein in the current account deficit - remained steady.

The deficit stood at $1.20 billion in the preceding month of November 2018.

The deficit is “much higher than our expectations of less than $1 billion (for December)”, said Topline Securities CEO Muhammad Sohail in brief comments.

However, for the first half (July-December) of the current fiscal year 2018-19, the current account deficit stood at $8 billion, lower than $8.4 billion in the corresponding period of previous year.

The CEO of Topline Securities was of the view that the brokerage house’s estimate of $12-billion deficit for FY19 would be difficult to achieve if the current account gap was not significantly curtailed in the months to come.

“Further tightening in the near term through interest rate hike and depreciation cannot be ruled out,” he said. “The government should also announce significant additional taxation measures in next week’s mini-budget to curtail both demand and the burgeoning fiscal deficit.”

Imports into the country swelled 10.58% to $4.62 billion in December 2018 compared to $4.18 billion in November.

The uptrend in imports came after the government announced various packages for giving a boost to the sluggish exports as most of the imports were meant for exports.

In an incentive, the government has announced a uniform gas price for industries across the country by providing subsidy on supply of imported liquefied natural gas (LNG) to Punjab-based industries. The industries located in the rest of the country use locally produced gas, which is much cheaper than LNG.

Besides, the government has also cut power tariff for the industries, especially for the export-oriented sector. This week, it withdrew the cotton import duty as well.

In addition to these, the central bank has also let the rupee depreciate by a significant 32% in the past 13 months with an aim to bolster stagnant exports. The exports, however, have not increased significantly.

The exports improved just 5.8% to $2 billion in December compared to $1.89 billion in November, according to the SBP. On the other hand, the SBP has raised the benchmark interest rate by a massive 4.25 percentage points in the last 12 months to a six-year high of 10%.

The rate was hiked to turn bank credit expensive with the objective of curbing aggregate demand in the overheated economy. However, it seems to be insufficient keeping in view the widening current account gap.

Worker remittances rose 5% to $1.69 billion in December compared to $1.60 billion in the previous month.

Arif Habib Limited Head of Research Samiullah Tariq said the other day the drop in remittances came especially from the Middle Eastern countries where majority of the Pakistanis were based.

“Remittances are decreasing mainly from the Middle Eastern region (Saudi Arabia and Dubai) due to economic slowdown there,” he said. “The return of oil prices to lower levels has triggered the economic slowdown.”

He added that it seemed difficult to achieve the required growth (of 10%) in remittances due to persistent economic slowdown in the Middle East.

Quarterly, half-yearly data

The current account deficit for the October-December quarter amounted to $4.08 billion, which was 4.63% higher than $3.90 billion in the previous quarter (July-September).

The deficit for the first half (Jul-Dec) of FY19 stood at $7.98 billion, which was 4.4% lower than $8.35 billion in the same period of last year. 

Published in The Express Tribune, January 18^th, 2019.

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