Current account deficit widens by 63pc KARACHI: The current account deficit increased over 63 per cent in the first four months of 2016-17 on an annual basis, making the management of the external sector more difficult for the government.
The State Bank of Pakistan (SBP) reported on Friday the deficit rose to $1.76 billion in July-October against $1.08bn a year ago. This means the four-month deficit expanded by $684 million or 63.4pc on a year-on-year basis.
The country has been unable to contain the current account deficit despite holding record-high foreign exchange reserves built partly because of growing remittances sent by the overseas Pakistanis for the last many years. The SBP said workers’ remittances recorded double-digit growth in the past many years, but the trend is unlikely to continue.
Despite a gradual recovery in oil prices, the Gulf governments are unlikely to revert to the kind of infrastructure spending that was in place before the oil price crash.
Their focus is likely to remain on economic transformation that can help them reduce their dependence on oil revenues.
“We expect remittances growth to remain tepid in 2016-17. In overall terms, the current account deficit is likely to stay in the range of 0.5-1.5pc of GDP during 2016-17,” said the SBP annual report on the State of the Economy issued on Thursday.
Key risks to this forecast include the immediate impact of Brexit on international commodity prices (its impact on Pakistan’s exports to the UK will become clear over the medium term), slowdown in the Chinese economy and an unexpected change in the pace of work on China-Pakistan Economic Corridor (CPEC) projects.
The government could not improve the external sector despite higher foreign inflows, which reflects the impact of borrowed money that requires debt servicing. Annual debt servicing is about $5bn, which will go up substantially after 2020.
The SBP said the strengthening of the external account, underway for the past two years, continued in 2015-16. “While the current account deficit deteriorated during the year, it was comfortably financed by higher foreign exchange inflows in the form of IMF disbursements, official debt flows (including short-term commercial borrowings) and a surge in foreign direct investment (FDI),” said the SBP report.
However, the increase in FDI was slightly higher than the poor performance in the preceding year. FDI has fallen 48pc year-on-year in July-Oct.
Pakistan has received extra help from declining oil prices. They started falling in July 2014 and still hover around $42-$45 per barrel, less than 60pc of the prices before the slump in the oil market.
The oil import bill fell substantially during the last couple of years, but the trade deficit kept increasing due to poor exports and soaring imports.
In fact, increased official inflows have become more crucial from the balance-of-payment standpoint, as they have been offsetting foreign exchange pressure stemming from the trade account.
“While low oil prices made it easier for the country to finance the import of industrial goods (particularly machinery and steel) to supplement higher economic activity, exports continued to cast a shadow on the external front; export receipts declined 8.8pc in 2015-16 after falling 3.9pc in 2014-15,” said the SBP.
The government remained unable to find ways to boost exports that could reduce the trade gap hovering around $20bn.