C/A deficit falls 54% year on year to $703 million in August

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KARACHI: Pakistan’s current account deficit narrowed by 54% to $703 million in August from $1.5 billion a year ago as exports increased and import growth fell slightly.

Data from the State Bank of Pakistan showed late on Wednesday that the current account deficit fell 42% month-on-month in August. The country recorded a deficit of $1.2 billion the previous month.

Merchandise exports rose 20% year-on-year to $2.8 billion in August. Imports fell 4% to $5.7 billion. Remittances rose 2% to $2.7 billion in August from $2.6 billion in the same month a year earlier. Analysts attributed the decline in the current account gap to slowing aggregate demand and government policy aimed at curbing imports.

“The economy is slowing down and the government has also maintained tight controls on imports, so I don’t expect a bigger CAD (current account deficit) in the near term. The floods will have some impact, but they will be partially offset by expected aid and increased remittances to assist flood victims,” said Fahad Rauf, Head of Research at Ismail Iqbal Securities.

The current account gap narrowed by $0.5 billion or 19% to $1.9 billion in the first two months (July-August) of this fiscal year, mainly due to increased exports of $0.5 billion and the import contraction of $0.2 billion, the SBP said on its official Twitter handle.

Due to difficult political choices, Pakistan was able to relaunch an International Monetary Fund (IMF) program after several months of delay. However, the sense of optimism faded just before the catastrophic rainfall in the country. Losses estimated at $30 billion resulted from the flooding.

Because there is not enough external financing, the rupee is under pressure. So far this month, the rupee has lost 8.74% of its value against the dollar. Despite securing $1.1 billion in financing from the International Monetary Fund at the end of August, foreign exchange reserves held by the State Bank of Pakistan as of September 9 stood at $8.6 billion, which is only enough for about a month of imports. The current account deficit after the floods would not increase by more than $2 billion, according to Finance Minister Miftah Ismail.

The burden of the floods on the trade balance would amount to $5.1 billion (1.4% of GDP), driven by $4.6 billion in additional imports of cotton, wheat, sugar, other crops and edible oil while the amount of lost exports was expected to reach $1.2 billion, consisting of $709 million in the case of rice and $500 million in declining textile exports, according to a Taurus Securities Limited report.

Remittances would likely accelerate as inflows may increase for rehabilitation purposes. In addition, grant, aid and relief inflows are also expected to help improve foreign exchange reserves, according to the report. The current account balance for fiscal 2023 would likely reach 4.3% of gross domestic product, compared to earlier expectations of 3.5% of GDP, he added.

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