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CA balance July, light at the end of the tunnel

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August 7, 2019 (MLN): Pakistan’s current account balance which has remained in negative since FY05 on the back of large trade imbalances, emanating from an anaemic export base exacerbated by a prolonged overvaluation of the exchange rate and rising import bills is now expected to improve considerably or might turn positive in the month of July.

It sounds uncanny however, a diverse set of recently evolved interrelated factors are expected to reduce Pakistan’s current account deficit by a significant amount in the month of July 2019 which would help the government to achieve growth target in the long-run.

Among the many factors that are expected to contribute to its surfeit, the primary one is the expected decline in import bills. Since the officials of the Federal Board of Revenue (FBR) said that they have missed the revenue collection target by Rs 14 billion for the month of July mainly because of plummeting imports in that month signifies that the upcoming trade figures for the month of July will display a decline in Pakistan’s imports.

The current government has taken effective measures to curtail CAD, such as the imposition of regulatory duties on luxury items and automobiles. As a result of this, Pakistan’s current account deficit narrowed by 32 percent to $13.59 billion in the last fiscal year.

On the other hand, export fugures which have been showing a dismal picture since last year despite massive rupee devaluation, are expected to increase. As the adviser to Prime Minister on Commerce Abdul Razak Dawood said on Wednesday that Pakistan’s exports have increased by 14.23% in July this year, as compared to the same month of last year. This implies towards the improvement in Pakistan’s trade balance for the month of July.

The second main factor that would likely play a key role in reducing country’s current account deficit is the flow of remittances that are expected to speed up in the month of July ahead of Eid ul Azha next week. Moreover, exchange companies are expected to fetch higher remittances than usual before Eid which will provide cushion to a current account deficit.

The higher inflows of remittances are witnessed in the weeks before the two Eid’s every year. Pakistanis working and living abroad send more money back home than usual in the weeks before the Eid. This intuitive was visible in May 2019 as the month brought increased inflows on account of Ramazan and Eid-ul-Fitr.

Moreover, the measures taken by the government to tackle the black economy, by initiating a crackdown on the Hawala and Hundi system will also help in boosting remittances.

The third main factor behind this hypothesis is the increase in country’s foreign reserves after receiving first tranche of $1 billion from IMF under the Extended Fund Facility (EFF) to reduce economic vulnerabilities on July 10, 2019 that rose country’s total forex reserves by 1.34% to $15061.8 million as of July 26, 2019.

In addition, at the beginning of the FY20, Pakistan started receiving monthly oil supplies worth $275 million from Saudi Arabia which will remain continue for next three years, would also help easing pressure on the balance of payments.

By taking the above-mentioned factors into consideration, it forms the basis to predict that in July country is expected to witness a noteworthy scale down in current account deficit.  This suggests that the first month of the current fiscal year is expected to be wholesome for Pakistan’s CA balance.

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Posted on: 2019-08-08T16:04:00+05:00