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Falling account deficit

In developing countries, researchers see that the current account deficit is regarded as one of the significant reasons for unsteady growth. Thus, the controllability of current account deficit and the selection of strategies to be implemented play a determining role on economic growth of any country’s performance. Researchers also believed that the current account deficit is no doubt a significant signal of competitiveness and the level of exports and imports. Moreover, a large current account deficit generally implies some kind of imbalance in economy, which needs correcting with depreciation in the exchange rate or enhanced competitiveness over time. However, it is not straightforward a current account deficit can often be reduced naturally over time as capital flows cause revaluation in the exchange rate.

Statistics show that Pakistan’s current account deficit fell by 27 percent during the first 9-month of FY2018-2019 largely because of lower goods import bill. The current account deficit narrowed to $11.586 billion in July-April of FY2019 as against to a deficit of $15.864 billion during the corresponding period previous year FY2018, explaining a decline of $4.278 billion in the country. Furthermore, the reduction in current account deficit is chiefly driven by import compression and a healthy growth of some 8.5 percent in workers’ remittances.

Overseas Pakistani workers have remitted $17.9 billion in July to April of FY2019 as against with $16.482 billion received during the corresponding period previous year FY2018. Despite the some improvement in the current account and a noticeable increase in official bilateral inflows, sources mentioned that the financing of the current account deficit is remained challenging, that forced the Government of Pakistan to attain financing from friendly states/countries. Statistics also showed that the federal government has borrowed some $3 billion from Saudi Arabia, $2 billion from UAE and $2 billion from China to support the external account and build the depleting foreign exchange reserves. In addition, the International Monetary Fund (IMF) and government of Pakistan have presently reached a deal for $6 billion loan program to support the external account. International economists significantly noted that financing current account deficit by direct investments or inflow of foreign currency enlarged over a long period of time is relatively less problematic or risky.

 

On the other hand, financing current account deficit by speculative short-term and external debt-increasing hot money inflow may pose a big danger for economy. The foreign capital used in financing the deficit may not show tolerance towards a country which consumes more than it produces when a specific threshold is exceeded. Furthermore, Pakistan’s economists urged that there is need to generate more resources of foreign inflows to meet the growing current account deficit. The State Bank of Pakistan (SBP) recorded that during the period under review, cumulative deficit of goods, service and income was fallen by 10 percent. The combined deficit of goods, service and income reached at $31.609 billion in first 10-month of FY2019 as against to $35.083 billion in the corresponding period of previous fiscal year.

Pakistan’s Balance Of Trade (Million US $)
PeriodExports Imports Balance of Trade
Jul-182,0125,497-3,485
Aug-184,08410,063-5,979
Sep-185,88513,857-7,972
Oct-187,94418,702-10,758
Nov-189,83923,009-13,170
Dec-1811,85027,843-15,993
Jan-1914,12232,246-18,124
Feb-1915,99135,686-19,695
Mar-1918,02039,833-21,813
Apr-1920,09944,033-23,934

With $20 billion exports and $ 44.033 billion imports, Pakistan’s goods deficit reached at $23.934 billion in July-April of FY2019 as compared to $ 25.813 billion trade deficit in same period of previous fiscal year. During the period under review, services trade deficit was recorded to $3.217 billion with $4.453 billion exports and $7.67 billion imports. Similarly, deficit of income sector also recorded some growth. Income sector deficit reached at $4.458 billion as its payments were recorded to $5 billion as compared receipts of $564 million. Month on Month (MoM) basis, during April 2019, current account deficit was recorded to $1.24 billion as compared to $871 million in March 2019. Therefore, current account deficit poses a threat to macroeconomic stability and balanced growth in Pakistan.

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