ISLAMABAD - Pakistan’s current account deficit has narrowed by over 31 percent in last fiscal year due to the reduction in trade deficit and healthy growth in workers’ remittances.
The current account deficit has gone down by $6.31 billion to $13.6 billion in previous fiscal year (July 2018 to June 2019) from $19.9 billion of the preceding year. The current account deficit was recorded at 4.8 percent of the GDP in year 2018-19 as compared to 6.3 percent in the corresponding period a year earlier.
The deficit has reduced due to the massive reduction in trade deficit of the country. Trade gap in goods and services has shrunk 7.96 percent to $32.5 billion as imports slowed down on regulatory duties and rupee devaluation. In last fiscal year, imports of goods fell to $52.4 billion from $56.6 billion in the corresponding period a year ago, according to the SBP’s data. Exports, however, slightly decreased to $24.2 billion from $24.8 billion. The narrowing trade gap was aided by healthy growth in workers’ remittances. Remittance flows rose 9.7 percent to $21.842 billion in last fiscal year that ended on June 30 this year. In May, current account deficit decreased 49.51 percent year-on-year to $995 million. The State Bank of Pakistan in its latest monetary policy noted that current account deficit has also continued to fall suggesting that external pressures continue to decline. It added that external conditions show continued steady improvement with a sizeable reduction in the current account deficit which fell by 29.3 percent to US$ 12.7 billion in Jul-May FY19 as compared to US$ 17.9 billion during the same period last year. This improvement was primarily driven by import compression and healthy growth in workers’ remittances. Export volumes have been growing even though export values have remained subdued due to a fall in unit prices as also experienced by competitor exporting countries. Future developments in export performance will also depend on growth rates of our trading partners and progress in alleviating domestic structural impediments.
The International Monetary Fund had projected that current account deficit is expected to quickly adjust and narrow to less than 2 percent of GDP by FY 2024. Initially, import demand will be contained by tighter fiscal and monetary policies, while a gradual export recovery will take hold, underpinned by competitiveness gains from the real depreciation and new investment. Increasing remittances and FDI flows, as well as multilateral and bilateral creditor financing will provide financing in the coming years. International reserves will gradually recover to over 4 months of import cover by 2023, albeit still short of 100 percent of the Fund’s ARA metric.
According to the IMF, the current account deficit started to narrow in FY 2018/19 second half (January to June) on the back of rupee depreciation, after widening to 6.3 percent of GDP in FY 2017/18. The narrowing has been mainly driven by import compression, particularly non-oil imports. Remittances, which account for 6½ percent of GDP, exhibited strong growth of 10.4 percent in July-May FY 2018/19. Nonetheless, higher oil prices have partly offset the import compression. Export growth remains tepid due to lower export prices and also partly constrained by structural impediments such as weak institutions and business environment.
