Alarming: Current account deficit widens, SBP data reveals

Increasing import bill, decline in CSF payments cited as reasons.

Our Correspondent February 19, 2014
January alone witnessed a current account deficit of $464 million as opposed to a surplus of $283 million in the preceding month. DESIGN: ESSA MALIK


Pakistan’s current account deficit widened to over $2 billion in the first seven months of 2013-14 as opposed to a deficit of $441 million in the corresponding period of 2012-13, according to data released by the State Bank of Pakistan (SBP) on Wednesday.

Shown as a percentage of the gross domestic product (GDP), the current account deficit widened to 1.4% in July-January as opposed to 0.3% in the same period last year.

January alone witnessed a current account deficit of $464 million as opposed to a surplus of $283 million in the preceding month.

Speaking to The Express Tribune, Standard Chartered Bank Senior Economist Sayem Ali said the country’s balance of payment (BoP) position remains ‘extremely vulnerable’ with the SBP-held foreign exchange reserves declining to a critical level of $2.8 billion, which provides less than one month of import cover.

“Despite disbursement of $1.1 billion from the International Monetary Fund (IMF) under the new three-year facility, foreign exchange reserves continue to decline due to a rising import bill and declining foreign investment flows,” he said.

Pakistan exported goods worth $2.1 billion in January as opposed to exports totalling $2.3 billion in the preceding month, reflecting a month-on-month decrease of 8.2%. For the July-January period, however, exports increased to $14.7 billion, up 3.3% compared to the corresponding seven-month period in fiscal 2013.

“The rise in the current account deficit is primarily due to an increase in the import bill and a decline in US Coalition Support Fund (CSF) payments from last year,” Ali said, adding the full-year current account deficit is likely to be significantly higher than the government’s target of $1.6 billion for fiscal 2014, putting further strain on the weak foreign exchange reserves position.

Workers’ remittances remained $1.2 billion in January as opposed to $1.3 billion in November, which shows a monthly decrease of 10.2%. Workers’ remittances in July-January increased to $9 billion, registering an increase of 10% over the corresponding seven-month period in the preceding fiscal year.

Ali said foreign investment flows have slowed down due to the worsening security environment and delays in the formulation of government policies on energy, privatisation and the expected spectrum auction.

Pakistan received foreign direct investment (FDI) of $523 million in the first seven months of 2013-14, which is 1% lower than the amount the country received in the corresponding seven months of the preceding fiscal year.

Although foreign exchange reserves have continued to decline, the rupee has gained strength to Rs104.9 a dollar by February 13, Ali said, noting that it stood at Rs108.5 a dollar at the end of November. “This has been done through SBP interventions in the interbank market as well as the swaps and forwards market. The government has also moved the big oil payments -- accounting for nearly 40% of all dollar demand in the interbank -- away from the interbank,” he said.

Ali observed that the misalignment of the rupee is leading to a sharper drawdown of foreign exchange reserves, as these interventions have strengthened the rupee in the short term only.

As exports decreased over 8% month-on-month and imports increased 1% over the same period, the trade gap widened to 21% on a monthly basis to $1.4 billion in January.

“The widening trade gap is leading to a sharper drawdown of foreign exchange reserves,” he said.

Published in The Express Tribune, February 20th, 2014.

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Showmethemoney | 7 years ago | Reply

This war on terror has helped our foreign exchange reserves. CSF is a great help we receive from America every year.

Careful Reader | 7 years ago | Reply

We are returning to 1999. The nawaz league government will lead the government towards default. Do you remember when the reserves were at only $500 million in 1999?

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