July 21, 2020 (MLN): Pakistan's Current Account Deficit (CAD) during FY20 has shrunk by 78 percent YoY to $2.96 billion which is 1.1% of GDP, compared to a deficit of $13.43 billion in FY19 which was 4.8% of GDP.
Positively, in both USD terms and percentage of GDP terms, the CA deficit is at a 5-year low, a report by Topline Securities said.
The latest data issued by State Bank of Pakistan (SBP) shows that Pakistan posted a surplus on two occasions in FY20, first in the month of Oct’19 when the current account was positive by $70 million and second time was in May’20 by $344 million.
In the month of June’20 alone, the current account deficit stood at $96 million, compared to the deficit $981 million in June 2019 and the surplus of $344 million in the previous month.
According to the report, higher deficits on both Balance on Trade in Goods and Services by $440 million and US$220 million, respectively resulted in a current account deficit for the month. The deterioration in Balance on Primary Income by $440 also played its part.
The Exports of Goods during the month improved by $321 million, up by 25% MoM, however Imports of Goods also increased by $761 million, up by 27% MoM, resulting in deterioration of Trade Balance. The increase in imports is largely attributable to import of higher quantity of petroleum products and their higher prices, the report highlighted.
During FY20, the trade deficit in Goods improved by 28% YoY to $19.9 billion as imports declined by 18% YoY to $42.4 billion while exports also decreased by 7% YoY to $22.5 billion.
The decline in imports is largely attributable to government increasing import duties to curb the Trade Deficit, a higher PKR/USD, decline in international oil prices and the impact on economic activity due to COVID-19 outbreak, the report underscored.
Trade balance in services, while still negative, also improved by 43% YoY to $ 2.83 billion courtesy of a 24% YoY reduction in imports though the exports also decreased by 9% YoY.
Worker remittances during FY20 also improved by a slight 6% YoY to $23.12 billion from $21.7 billion in FY19. Whereas, in the month of June’20, worker remittances showed a significant growth of 51% YoY and 32% MoM to $2.46 billion.
On the other hand, the Financial Account also recorded a surplus in FY20 of $7.7 billion owing to $2.52 billion Foreign Direct Investment (FDI) which surged by 76% YoY and program loans from multilateral agencies. Thus, the overall Balance of Payment recorded a surplus of $5.30 billion during the year compared to a deficit of $1.50 billion last year.
In the 4QFY20, the quarter most affected by the emergence of COVID-19 pandemic, the current account recorded a deficit of $282 million which was 0.4% of GDP compared to 3QFY20 deficit of $652 million (1.0%of GDP).
Though the government has succeeded in bringing down the current account deficit in FY20, the exports have failed to register any noticeable growth despite decline in Rupee’s value, as the Covid-19 pandemic has put the country’s export growth at risk.
Going forward, the report forecasted Pakistan’s current account deficit to clock in at $4-4.5 billion in FY21 i.e. around 1.5-2% of GDP, as COVID-19 related lockdowns and restrictions ease globally and international oil price also trend up.
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