Pakistan's current account deficit narrows 71% in Jul-Feb FY20

Deficit contracts to $2.84b mainly due to significant drop in imports

KARACHI: Pakistan’s current account deficit - the gap between foreign payments and inflows - narrowed down 71% to $2.84 billion in first eight months (July-February) of the current fiscal year mainly due to a significant drop in imports.

The current account deficit had been at $9.81 billion in the same period of previous fiscal year, the State Bank of Pakistan (SBP) reported on Wednesday.

In February, the deficit amounted to a nominal $210 million. It was 61% lower than the deficit recorded in the previous month of January and 38% down compared to February 2019. “The downturn in international oil prices has partly helped Pakistan slash the import bill,” Topline Securities’ Director Research Atif Zafar said while talking to The Express Tribune.

Pakistan heavily relies on imported energy resources. The international benchmark oil price (Brent) dropped over 15% to below $50 per barrel in the month of February.

The share of energy stood at one-fourth ($8.23 billion) in the country’s total import bill of $31.51 billion in the first eight months of FY20, according to the Pakistan Bureau of Statistics (PBS). Now, the crude oil price has dropped over 50% to below $30 a barrel compared to around $60 at the beginning of February. The decline came due to the global economic slowdown and an oil price war between two major oil-exporting nations amid the outbreak of coronavirus.

The low oil price would leave an overall positive impact on Pakistan. “Latest developments (the low oil price and global economic slowdown) can further reduce the current account deficit by $500-600 million in FY20,” Zafar said. “We had estimated a current account deficit of $4.5 billion for FY20 before the massive drop in oil price. The deficit may now stand at $4 billion,” he estimated. The import of goods dropped 17.5% to $29.65 billion in the first eight months of FY20 compared to $35.94 billion in the corresponding period of previous fiscal year, the central bank said.

However, the rapidly worsening global economic and health situation could negatively impact Pakistan’s foreign income. “The situation may lead to a slowdown in the inflow of dollars on account of a likely drop in exports and workers’ remittances,” he said.

“However, the drop in oil imports (by around $4-5 billion) will offset the impact of low dollar inflows (by around $2-3 billion in a year),” he pointed out. “This may give a net benefit of around $500-600 million in the remaining four months (March-June) of the current fiscal year.”

In the first eight months of FY20, however, the exports improved around 3% to $16.43 billion compared to $16 billion in the same period of last year, the SBP said.

Similarly, workers’ remittances rose over 5% to $15.12 billion in the period under review compared to $14.35 billion in the corresponding period of previous year, it added.

A massive depreciation of the rupee - over 50% - against the US dollar between December 2017 and June 2019 partly helped the country lift exports and attract higher remittances.

The persistent drop in the current account deficit helped in building the country’s foreign currency reserves by $5.48 billion to $12.76 billion by the end of February 2020 compared to $7.28 billion at the end of June 2019. This helped the rupee to stabilise in the past eight months. It closed at Rs158.52 to the US dollar on Wednesday.

Taurus Securities Head of Research Mustafa Mustansir said it would be premature to quantify the net benefit and loss to the national economy in the wake of coronavirus pandemic. However, the closure of Pakistan’s border with Afghanistan may result in an increase in the current account deficit. “We have trade surplus of around $1 billion with Afghanistan and all trade is done via land between the two countries,” he said.

Besides, the lockdown in European countries may cause delay in Pakistan’s exports. There was conflicting news that the European nations delayed or cancelled some of the export shipments since their markets were completely closed.

Similarly, if the international oil price remains stagnant at lower levels, then it will cause job cuts in the oil-exporting countries, including those in the Middle East, where a majority of Pakistani expatriates are employed and most of them being daily-wage workers. 

Published in The Express Tribune, March 19^th, 2020.

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