CA deficit
According to the latest State Bank figures, Pakistan's current account deficit has widened 50% to a record high of $14.03 billion in the first 10 months of the current fiscal year 2018. The deficit stood at $9.35 billion in the same period of the previous fiscal year. The 10-month cumulative deficit of $14.03 billion is much higher than the complete fiscal year 2017's deficit of $12.62 billion. The current account deficit in April 2018 alone stood at $1.95 billion, which is 61% higher than $1.21 billion recorded in the prior month of March 2018.
The deficit is also expected to surpass the estimated figure of $16 billion for fiscal year 2018 after the price of crude oil (the benchmark Brent crude) surged sharply in the international market to three-and-ahalf-year high of $80 per barrel last week from around $50 per barrel at the outset of the current fiscal year on July 1, 2017. The deficit increases woes of the country's economic managers as a widening current account takes toll on foreign exchange reserves that have already fallen below $11 billion last week. The situation may even force the government to go back to the International Monetary Fund (IMF) for a bailout package.
Pakistan's economy depends heavily on imported oil and Liquefied Natural Gas (LNG) to fuel its industries as well as fulfil demands of domestic consumers. The country meets almost three-fourths of its energy needs through imports, which contributes close to one-third in the overall import bill of the country. The government has also devalued the rupee by around 9.5% in two rounds (5% in December 2017 and 4.5% in March 2018) in a bid to narrow down the deficit. The measure has resulted in increasing exports, but largely failed to slow down imports. The trade deficit increased 20% to $25 billion in 10 months compared to $20.77 billion in the same period last year. Accordingly, imports increased 17% to $45.56 billion from $38.91 billion and exports enhanced 13% to $20.55 billion from $18.14 billion.
The trade deficit (including of services) rose to $29.21 billion from $24.09 billion. On the other hand, an uptick in workers' remittances sent home by overseas Pakistanis slightly controlled the widening deficit. Remittances rose 4% to $16.25 billion in the 10-month period compared to $15.64 billion in the corresponding period of the previous year. FDI increased 2.4% in July-April, amounting to $2.24 billion from $2.18 billion in the same 10-month period of the previous year. 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. It may be added here that the imports of goods and services cost the country about $42.6bn during July-Feb FY18 versus its exports of $19.4b.
The SBP has managed to maintain the exchange rate so far. Foreign exchange reserves of commercial banks have gone up to $6 billion, which would help maintain the inflow and outflow of dollars. Importers buy dollars from banks for their imports. Even the oil bill is paid through banks. To control the gap in imports and exports, the government recently enhanced regulatory duties by up to 350% on 356 essential and luxury goods. Experts are of the opinion that stricter import control measures are needed to reduce the widening CA deficit.