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CA balance to face challenges from low exports and foreign investments

July 17, 2019 (MLN): Recently the State Bank of Pakistan (SBP) released its third quarterly report on State of Pakistan’s economy for the Fiscal year 2019-20, as per which the overall macroeconomic situation remained challenging during the said period, as suggested by preliminary data.

However, the report also highlighted that the improvement in Pakistan’s current account balance during the aforesaid period gained further momentum as a significant decline in imports more than offset the stagnancy in exports and resulted in the shrinking of merchandize trade deficit.

The macroeconomic stabilization measures undertaken earlier resulted in a slowdown in economic activity in the country. The sizable decline in machinery imports following the conclusion of early phase of CPEC, lower quantum energy imports (excluding LNG) amid lower power generation in Q2 and Q3, and a temporary softening in global oil prices, all contributed significantly to improvement in the Current Account deficit (CAD) by reduction of import payments.

Thus, a slowdown in economic activity and government’s efforts to curb non-essential imports by imposing duties, seem to be just fine to reduce trade deficit, but the qualms haven’t yet disappeared as the other side of the equation i.e. the exports have shown no retrieval as yet, remained unanswered.

Exports in FY19 remained flattish. In the 1QFY19, they were down by nearly 12.66% QoQ, which went up to 4.73% growth by the end of 2QFY19. This is the time around which rupee depreciation started and the currency shed considerable value which reflected in exports numbers. However, in 3QFY19, the growth in exports started to slowdown, crushing to 0.03% QoQ by the end of 4QFY19.

Although trade deficit improved YoY in Q4, it would be worthwhile to note that the reduction in trade deficit by about 13.7% QoQ in 3QFY19 has been offset with rise in trade deficit by about 19% during 4QFY19, as the last quarter of FY19 witnessed 10.3% rise in imports along with a negligible (0.03%) growth in exports compared to previous quarter of FY19.

The SBP report further highlights that import payments dropped in Q3-FY19 was the largest drop in almost 10 years, and was more than sufficient to offset a marginal contraction in exports in the quarter, specifically due to declines in both energy and non-energy import payments.

Moreover, despite the contraction, the current account deficit (CAD) still remained at a higher level from the external account’s stability perspective. The average CAD between FY11-15 was US$ 2.6 billion only, while this number is US$ 10.3 billion in Jul-Mar. In addition, total foreign investment continued to decline since last three quarters of FY19 due to the looming uncertainty regarding the exchange rate adjustment and the finalization of the IMF program, which may have dented the investors’ confidence.

Besides, as per the SBP document, the lowering of Pakistan’s credit rating by Fitch in December 2018, due to the country’s external financing risk and deteriorating fiscal position, further exacerbated the situation.

By examining the above-mentioned scenario, it is sensible to say that despite the improvement in the CAD and trade balance, its management will remain challenging, especially when exports and foreign investments will not show corresponding increases.

Copyright Mettis Link News

Posted on: 2019-07-17T12:07:00+05:00

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