CAD likely to hover around $1bn in coming months: MoF

April 29, 2022 (MLN): With a rising trend in imports of goods and services due to the rise in international commodities prices amid geopolitical risks, the current account deficit (CAD) is expected to stay around $1 billion in the coming months, the monthly outlook of April 2022 by Ministry of Finance revealed.

However, in April 2022, it is expected that remittances may surge on account of the Eid festive.

During July-Mar FY22, the current account posted a deficit of $13.2bn as against $275 million last year on the back of the constantly growing import volume of energy and non-energy commodities, along with a rising trend in the global prices of oil, COVID-19 vaccines, food, and metals.

On the other hand, exports of goods and services expressed in USD are on an increasing trend since mid-2020. This followed the re-opening of domestic and external economies after the COVID-19 induced lockdowns. With the further domestic and international relaxing of protective measures against the pandemic, Pakistan’s exports benefited from a largely depreciated Nominal Effective Exchange Rate. It compensated for the differential between Pakistan’s inflation and the inflation in its main trading partners.

The domestic and international scenarios are changing which carries implications for the economic recovery, it said.

With regards to inflation, the report noted that YoY headline inflation for the month of April is expected to remain within a range of 11.5 to 12.5 percent.

The April inflation number may be subject to an upward seasonal effect.

High international commodity prices not only keep inflation elevated but also a burden on Pakistan’s external account and hence on its foreign exchange reserves, creating macroeconomic imbalances in the economy.

High inflation and the accompanying monetary policy reaction may temporarily dampen the cyclical position of Pakistan’s economy thereby reducing growth prospects in the short run. But in the long run, Pakistan’s productive capacity will determine its growth as well as employment prospects. This requires a substantial upward shift in the propensity to invest and the productivity of investment expenditures.

Strengthening Pakistan’s overall supply side by increasing its productive potential would allow it to produce more for exports and to discourage imports. These prospects would relax the external constraint that has historically weighed on Pakistan’s economy and which has caused regular Balance of Payments crises and an accompanying stop-and-go profile in Pakistan’s economic growth path, it added.

On the fiscal front, during Jul-Mar, FY2022, despite exceeding the revenue target by 5.8% to Rs4.37 trillion by the Federal Board of Revenue (FBR), the fiscal deficit has been increased to 4.0 percent of GDP against 3.0 percent of GDP last year due to higher subsidies and grants.  It is expected that the fiscal deficit may increase further in the coming months.

According to the monthly outlook, the country’s industrial sector kept the growth momentum intact. For March, it is expected that the YoY growth of industrial production has remained positive, although a slight contraction may appear compared to February.

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