CAD to settle around $1bn in June'22: MoF

June 28, 2022 (MLN):  The Current Account Deficit (CAD) which remained high during the first three quarters of the current fiscal year, may decelerate and settle at around $1 billion in June 2022, Monthly Economic Update & Outlook of June 2022 by Finance Division revealed today.

On the basis of the continued declining trend in imports on account of measures taken by the government, it is expected that improvement will be observed in the trade balance in June 2022 compared to the one observed in May 2022. The remittances fell considerably in May 2022 mainly driven by its seasonal profile. This together with the deterioration of the trade balance widened the current account deficit significantly.

Meanwhile, in June 2022, remittances are expected to rebound. Together with the expected relative stability of the trade balance, a contraction in the current account deficit is expected.

In the month of June 2022 exports are generally affected by a negative seasonality, but it is expected that the downturn will be to a lesser degree compared to May 2022. Therefore, exports are expected to perform somewhat better in June 2022.

The report further highlighted that the current account balance may profit from sound demand management policies. In the longer run, elevating the growth rate of potential output reinforces the supply side of the economy, accompanied by neutral demand management will bring the CAB onto a long-run sustainable path.

Meanwhile, the delayed pass-through of international oil prices into domestic energy products may increase inflation. Inflationary pressure may ease once international commodity prices start to decline and stabilize.

The government will continue to alleviate the burden of the poorest segment of society through various programs. In this scenario, YoY inflation is expected to accelerate in June and may remain within a range of 14.5 -15.5 percent, it noted.

Going forward, Pakistan’s growth prospects are expected to remain satisfactory. But the number of potential risks may diverge it from the optimal path.

First, the cyclical position of Pakistan’s main trading partners is somewhat deteriorating. Their central banks are raising interest rates to counter inflation thus leading to a possible recession in those countries. Second, SBP may further raise domestic interest rates. The demand management policy of SBP may not be very effective as the current waves of inflation are largely caused by supply constraints and increasing international prices, especially commodity prices.

The report further stated that exchange rate depreciation is also a source of concern as it makes the imported raw material more expensive. Third, the persistent rise in domestic consumer prices is eroding real incomes, limiting the spending power of consumers and investors.

These risk factors may challenge the macroeconomic environment and growth prospects, especially by negatively affecting the temporary cyclical output gap. The economy would tend back to potential output in the long run. Sound policy responses may lay the basis for a sustainable long-run growth trajectory.

“This should be accompanied by measures that aim to strengthen the growth of Pakistan’s potential output,” it added.

These measures need to include the creation of a beneficial investment climate, confidence promotion, and stimulus for promising economic initiatives with high growth potential.

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