Current account deficit shrinks to $0.5b

Beating worrisome expectations, Pakistan's current account deficit surprisingly nosedived to a sustainable level at an eight-month low of $545 million in February in the wake of "timely actions" taken by the government. The current account deficit (CAD) – the gap between the country's higher foreign expenditures and lower-income – narrowed down to one-fifth against an all-time high hit at $2.53 billion in the prior month of January 2022.

"Timely actions to contain current account deficit bear fruit," Prime Minister Imran Khan said on his official Twitter handle on Saturday. The deficit shrank by $2 billion in February from the one in January. It is the "lowest monthly deficit so far this fiscal year. Exports (surged) close to all-time high and imports down 21% from their peak and strong growth in large scale manufacturing."

"Exports were close to all-time highs, rising 16% (in February) compared to January. Imports fell by 18% to their lowest level in FY22," State Bank of Pakistan (SBP) reported through its Twitter handle.
Besides, receipt of strong workers' remittances improved 2% during the month of February compared to the previous month of January, the central bank data suggested.

Shedding light on the "timely actions", Pak-Kuwait Investment Company (PKIC) Head of Research Samiullah Tariq said, "The increase in benchmark interest rate helped to cut the import bill, while rupee depreciation against the US dollar under the flexible and market-based exchange rate mechanism supported realizing the much-required growth in export earnings."

The steep decline in the current account deficit should support the rupee to partially recover ground against the greenback and reduce yields on long-term sovereign bonds like Pakistan Investment Bonds (PIBs) in both primary and secondary markets, he said. "The market was expecting a current account deficit in the range of $1-1.5 billion for the month of February…keeping in view a large trade deficit of $3-1 billion reported by Pakistan Bureau of Statistics (PBS) for the month," Arif Habib Limited (AHL) Head of Research Tarhir Abbas said.

This current account deficit number, however, came significantly low when the State Bank of Pakistan (SBP) calculated the trade deficit using its own payment data. "SBP has worked out trade deficit at $2.3 billion for February compared to $3.1 billion reported by PBS earlier," he said, adding that around $800 million drop in current account deficit came from here against the expectations.

SBP compiles trade data using its own import payment and export receipts data, while PBS does so using Customs import and export data. Besides, the trade deficit in services also shrank significantly by 41% to $284 million in February from $485 million in January, he said and added trade in services is only recorded by SBP and not by PBS.

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"The current account deficit of up to $700 million a month remains sustainable for Pakistan," he said.
The deficit, however, spiked to over $12 billion cumulatively in the first eight (Jul-Feb) of the current fiscal year 2022 compared to the current account balance in surplus at slightly below $1 billion in the same period of the last year, according to the central bank's data.

Abbas said the deficit may remain slightly higher than the sustainable level over the next couple of months due to elevated international crude petroleum price at present, as Pakistan heavily relies on imported energy. "We see the current account deficit widening to $16-17 billion, or around 4.5% of GDP, in the current fiscal year 2022…against mere 0.6% of GDP in the last fiscal year 2021," he said.

He, however, said his research house sees international crude oil prices reducing to around $60-65 per barrel by end of the current fiscal year on June 30, 2022, from around $95 a barrel at present.
"The resolution of Russia-Ukraine war and US-Iran nuclear deal would help to reduce the oil price and help Pakistan reducing current account deficit and inflation reading, going forward."

Abbas said the drop in imports was seen across the board due to the government and central bank measures like the imposition of additional import duty on luxury goods like cars. Other imports – like Covid vaccination and oil imports facilitated by friendly countries through deferred payments and grants – reduced by $900 million in February compared to January.

The food import bill was reduced by $131 million in February from January. Machinery imports dropped by $118 million, agriculture and other imports cut by $86 million, while transport imports declined by $71 million in February compared to January, he said.