CAD unchanged despite flood losses

No revision in SBP’s projection hints at both positive, negative developments

KARACHI:

Pakistan’s central bank has reaffirmed its projection for the current account deficit (CAD) – the gap between the nation’s higher foreign expenditures and low income – to narrow down to 3%, or around $10 billion of gross domestic product (GDP) for the current fiscal year of 2023.

To recall, the deficit had soared to 4.6% of GDP in the previous fiscal year ended June 30, 2022. In absolute terms, the deficit had hit a second historical high of $17.4 billion in FY22. According to the latest monetary policy statement announced on Friday, the State Bank of Pakistan (SBP) has kept its outlook on the deficit unchanged at 3% of GDP, despite the emergence of flood related losses amounting to over $30 billion. Therefore, no revision in its projection hints at both positive and negative developments in the economy over the current fiscal year.

The expected drop in CAD suggests Pakistan’s outflows will reduce notably, while its inflows will improve in the year. Accordingly, its balance of payment – the country’s capacity to make international payments – is going to gradually improve.

The expected drop in the deficit, which is strongly backed by a significant cut in CAD in the previous two months (September and October) also supports the government’s assertion that the country will make all the international payments due on time including the commercial loans and loans against maturing debt instruments. This also negates the global portfolio investors’ anxiety over a likely default on repayments.

On the other hand, the low deficit suggests that economic activities will remain stifled, as the deficit has been controlled through a significant cut in imports in the year. A majority of experts contend that imports are essential to procure necessities/essential items and keeping exports stable.

Speaking to the Express Tribune, Pak-Kuwait Investment Company (PKIC) Head of Research, Samiullah Tariq said, “The central bank’s projection for a current account deficit at 3% of GDP is in line with market expectations in the range of 2.5% to 3% for FY23.”

“The central bank has, however, hinted at two challenges, among others, which can be addressed through slide changes to further improve the CAD,” he added.

Tariq recalled that the “central bank has underlined low inflows at $1.9 billion under financial accounts (foreign direct investment and foreign portfolio investment) in the first four-months (July-October) of FY23, as compared to $5.7 billion during the same period last year.” “Increasing the rate of return on Naya Pakistan Certificates (NPCs), being offered to overseas Pakistanis, can help improve the country’s financial accounts,” he suggested.

“The revision in rate of return on NPCs can improve inflows,” Tariq emphasised, adding that financial experts have been suggesting authorities revise the rate upwards for the past several months. Secondly, the central bank has hinted at widening the gap between the value of dollars in the interbank market and the open market.

The open market is selling dollars at a rate that is Rs10-12 more expensive (Rs236), as compared to around Rs224 in the interbank market. The gap is seen due to the government controlling the interbank market. This has indirectly supported the reorganisation of illegal hawala-hundi operators and black currency markets that offer an increased price for dollars.

“The government should let the market forces determine the rupee-dollar exchange rate. This will depreciate rupee against the US dollar but improve earnings and inflows from workers’ remittances,” Tariq suggested. He further added that “export earnings and workers’ remittances are on declining trends due to the reactivation of the black currency market.”

The central bank has reported that the deficit during the first four months of FY23 fell to $2.8 billion, almost half the level during the same period last year.

Looking ahead, higher imports of cotton and lower exports of rice and textiles in the aftermath of the floods should be broadly offset by a continued moderation in overall imports due to the economic slowdown and lower global commodity prices.

Published in The Express Tribune, November 27^th, 2022.

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