CA deficit
According the State bank's latest figures, the country's current account deficit jumped by 50 per cent in the first eight months of FY18, making it more difficult for the government to meet the gap as its reserves continue to fall. The State Bank of Pakistan reported last week that the current account deficit of the country rose to $10.826 billion during July-February FY18 compared to $7.216bn in the same period. During FY17, Pakistan posted a current account deficit of $12.2bn as compared to $2.6bn in FY16 indicating that the deficit has been rising posing a serious threat to the economy. For the month of February, however, the trade deficit shrank by 16.55pc month-on-month to $2,687m, from $3,220m in January 2018.
With the difference between exports and imports being the biggest determinant of the current account imbalance, a deficit or surplus reflects whether a country is a net borrower or a net lender with respect to the rest of the world. The imports of goods and services cost the country about $42.6bn during July-Feb FY18 versus its exports of $19.4b. The remittances being sent by the overseas Pakistanis showed some improvement and the exports also increased up to 11pc during the last eight months but the increased trade deficit has hampered any possibility to curtail the current account deficit.
The government is desperately looking for an option to reduce the increased deficit but the trade deficit could not be curtailed despite a 5pc devaluation of local currency. The central bank's data release date coincides with a major fall of 4% of the rupee against the US dollar. Earlier, the government of Prime Minister Shahid Khaqan Abbasi allowed the rupee to fall by around 5% against the dollar in December 2017 in a bid to boost exports. Pakistan is struggling to increase its exports by providing cheaper money and a number of incentives to the exporters but the result was not up to the mark. Moreover, the rise in exports was mainly due to price hike of goods in the international market while the volume of exports could hardly increase during the eight months 2017-18.
For over three years, the PML-N government has been a proponent of a stronger rupee and was reluctant to let it lose its value against the dollar. Pakistan was among the very few countries in Asia that followed this policy, otherwise all important economies in Asia let their currencies go down to boost their exports. It also slapped additional regulatory duty on imports of over 350 items in October 2017 to slow down ballooning imports. The larger objective of the measures taken was to control the trade deficit. Investors have shown concerns about the growing deficit after the country recorded a much higher-than-expected deficit of $12.4 billion (4% of gross domestic product - GDP) in the previous fiscal year ended on June 2017. The deficit in FY16 was just $4.86 billion.
As a percentage of GDP, the deficit rose to 4.8% in the first eight months of FY18 as opposed to 3.6% in the same period of previous year. In Jul-Feb FY18, Pakistan exported goods worth $15.97 billion compared with exports valuing at $14.23 billion in the corresponding period of last year, reflecting a year-on-year increase of 12.2%. However, imports jumped at a faster rate to $35.66 billion, up 17.3% against $30.4 billion last year.
The balance of trade in both goods and services in the first eight months was negative at $23.22 billion, compared with $18.93 billion in the same period of previous year. Workers' remittances amounted to $12.84 billion in Jul-Feb FY18, up 3.5% from the corresponding period of previous year, when they totalled $12.41 billion. Remittances make up 36% of the import bill of Pakistan and mainly cover the deficit in the trade of goods account.