Monday, 06 July, 2020
Current account deficit rises to $18bn, reserves hit four-year low

Current account deficit rises to $18bn, reserves hit four-year low

Current account deficit (CAD) touched $18 billion in FY18, up 42.5 per cent over the previous fiscal year, the State Bank of Pakistan (SBP) reported on Thursday.

Only two years ago, the CAD was at $4.876bn, spiking to $12.621bn the following year, before hitting its record high in 2017-18.

Meanwhile, the SBP said foreign exchange reserves fell by $416 million during the week ended on July 13. The reserves held by the SBP now stand at $9.063bn while those held by commercial banks are $6.613bn. Total foreign exchange reserves come to $15.682bn

The State Bank data released on Thursday showed total import of goods and services in FY18 reached $66.2bn compared to $58.6bn in the previous fiscal year, an increase of 13pc. On the other hand, exports of goods and services increased to $29.9bn compared to $27.6bn last year, an increase of 8.3pc. Exports of goods increased by $2.7bn but the exports of services dropped to $5bn compared to 5.55bn.

The increase in exports failed to keep pace with the growth of imports. The widening trade gap is at the heart of the growing current account deficit, which is leading to a drain in foreign exchange reserves. At $18bn for the year, the CAD means the economy is burning $1.5bn every month on average.

The government has struggled with this situation since last July when an abrupt devaluation led then finance minister Ishaq Dar to lose his temper.

Since then, his successors at the finance ministry used a combination of regulatory duties and successive exchange rate depreciations to stem the tide of growing imports and falling exports. The caretaker government has imposed regulatory duty on a number of importable items while the State Bank has named 132 items for 100 cash margin.

However, the biggest step was the decision of depreciation of local currency up to 19pc during the fiscal FY18 to make the imports expensive and make the exportable goods cheaper for higher exports. The result may come in FY19 but the other impacts like rapid increase in main inflation is expected.

The State Bank in its recently announced monetary policy said that to manage expectations of higher inflation, the interest rate was increased by 100bps to 7.5 per cent. The Central Bank also projected lower than targetted GDP growth of up to 5.5pc for FY19 where the government’s target is is 6.2pc. Researchers in their report said the GDP could be around 5.1 to 5.2pc in FY19.

According to SBP report the trade deficit for FY18 was $36.245bn which was the main reason for $18bn current account deficit. Analysts said the remittances being sent by the overseas Pakistanis remained intact which helped the country to make payments for its external account.

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