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CAD may shrink in January: Finance Division

CAD clocks in at $3.8bn in 7MFY23: SBP
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January 31, 2023 (MLN): The Current Account Deficit (CAD) may shrink in January 2023 and stabilize during the second half of FY23, Finance Division said in its monthly Economic Outlook issued today.

The current account posted a deficit of $3.7 billion for Jul-Dec FY23 as against a deficit of $9.1bn last year, mainly due to a contraction in imports.

However, the current account deficit shrank to $400 million in December 2022 as against $1857mn in the same period last year, largely reflecting an improvement in the trade balance.

This was mainly due to an increase in primary income payments and a decrease in remittances. It is expected that in January these payments would return to normal levels, the report added.

According to BOP data, exports of goods decreased by 21.6% on a YoY basis in the month of December 2022, and exports of services declined by 3.2%. As a result, exports of goods and services declined by 18.1% in December. Usually, the month of December has observed a strong positive seasonal effect which has played some role and total exports increased by 2.3% on a MoM basis.

Exports are constrained by domestic production issues related to the slowdown of demand in the main export markets and high domestic production costs. Imports are currently constrained by sluggish domestic demand and administrative measures to protect the official foreign reserves level.

Since no immediate reversal of these developments is envisaged, the trade balance may further stabilize or further improve somewhat in the upcoming months.

In terms of inflation, the report stated that the CPI inflation on YoY basis for January 2023, is forecasted in the range of 24%-26%.

Rising prices of onions and wheat both are the key factors responsible for affecting the general price level. International commodity prices are showing a downward trend on a YoY basis and its impact will ultimately be transmitted into domestic prices with some lags after adjusting the currency devaluation.

While the government kept the administered prices at their current level to stabilize the overall prices but post floods persistent shortfall of essential crops is preventing inflation to settle down.

SBP is also enacting a contractionary monetary policy to contain inflationary pressure. However, a larger portion of volatility in the current price level is explained by supply-side factors. Further, the recent political and economic uncertainties both are causing inflationary expectations upward, it noted.

Pakistan is currently confronted with the challenges like high inflation, low growth, and low levels of official foreign exchange reserves.

Furthermore, the MoM increase in consumer prices may be countered by a further mean reverting international commodity prices and some exchange rate stability due to decreased pace of depreciation.

The overall money supply growth remains compatible with a return to low and stable inflation. But the outlook of M2 is broadly dependent on fiscal accounts which are under immense pressure on account of heavy interest payments and rehabilitation spending, it said.  

Nonetheless, the first five months of CFY have ended with some developments; containing fiscal deficit and surplus in the primary balance due to effective fiscal management. Fiscal consolidation is key to saving official reserves and exchange rate stability.

This may temporarily be costly in terms of growth prospects in the short term, but long-run prosperity and growth can only be achieved by augmenting the country's long-term equilibrium growth path by expanding production capacities and productivity.

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Posted on: 2023-01-31T15:25:51+05:00