Finance Ministry Forecasts Current Account Deficit to Ease in Coming Months

The Government of Pakistan expects the excess of imports over exports will gradually ease in the coming months, bringing the current account deficit to comfortable levels.

The Economic Advisor’s Wing (EAW) of the Ministry of Finance, in its Monthly Economic Update & Outlook for January, noted that the current account deficit — which occurs when the total value of goods and services a country imports exceeds the total value of goods and services it exports — will soon decline.

According to the EAW report, this tendency is being observed over the government’s policies aimed at boosting exports and reducing import demand, which will gradually reinforce this projected trend. Tentative monetary policy actions may also be helpful.

The report recalls that the current account posted a deficit of $9.1 billion (5.7 percent of GDP) for July-December FY2022 due to the constantly growing import volume of energy and non-energy commodities. Moreover, the growing global commodity costs, particularly for oil, COVID-19 vaccines, food, and metals, put extra pressure on import bills. Exports on FOB [free on board price] grew by 29.0 percent during July-Dec FY2022 and reached $15.2 billion, while imports on FOB grew by 56.9 percent and reached $ 36.4 billion.

The total imports increased by 70 percent to $40.6 billion while exports increased by 24.9 percent to $15.1 billion in July-December FY2022. The increase in overall exports is contributed by the growth in exports of value-added goods with almost 40 percent share in total exports.

On the import side, the main commodities imported were petroleum products, palm oil, crude, iron, and steel, Liquefied Natural Gas, medicinal products, plastics, textile machinery, electrical machinery and apparatus, power generating machinery, and raw cotton. Higher imports of these commodities indicate a growth in the related sectors as well. Keeping in view the rising trade deficit, the report remarks that the government is taking several measures to curtail it in the shape of new tax reforms under the recently passed Finance (Supplementary) Bill 2021.

The report explains that while seasonal effects are stronger on imports, the increase in exports is somewhat more robust than the rise in imports, which explains the decline in the trade balance of goods and services. Usually, in the months of January, these seasonal effects typically disappear, which may soften the export proceeds, but also to a more important moderation in import payments. It is therefore expected that the trade deficit will settle at lower levels in January and in the following months.

The report added, “Although the trade balance improved somewhat, the current account balance slightly deteriorated. This was mainly due to an unusual increase in primary income payments to non-residents. It is expected that in January these payments would return to normal levels. Together with the expected improvement in the trade balance due to prudent government measures, the current account deficit may decline in January and onward”.

Foreign investments in July-December increased by 20.1 percent to $1056.6 million, compared to $879.7 million last year. On the flip side, Foreign Private Portfolio Investment registered a net outflow of $307.2 million during the period in review.

Foreign Public Portfolio Investment recorded a net outflow of $98.3 million. In October 2021, an outflow of $1040 million was recorded due to the repayment of the Sukuk bond. The total foreign portfolio investment recorded an outflow of $405.5 million during July-December FY2022 as against an outflow of $438.2 million last year. The total foreign investment registered an inflow of $651.1 million during the period under review.

Remittances during the first six months of the ongoing financial year reached $15.8 billion compared to $14.2 billion last year, indicating an 11.3 percent increase. The report noted that workers’ remittances continued their unprecedented streak of above $2.0 billion for the 19th consecutive month in December 2021.

Pakistan’s total liquid foreign exchange reserves increased to $23.1 billion on January 19, 2022, with the SBP’s reserves now standing at $16.8 billion, commercial banks’ reserves remained at $6.3 billion. The report expects the recent auction of Ijara Sukuk amounting to $1 billion will help reserves to be at a more adequate level.

In terms of measuring the rate of rising prices of goods and services in the economy, the EAW report forecasts the already high inflation to remain in double digits year-on-year (YoY) in the coming month. It remarked that Pakistan’s inflation rate, like that of other nations, is still under pressure as a result of rising international commodity prices and economic agents’ expectations.

The government is working hard to bolster market functionality, notably in the food markets, it added.