July 19, 2021 (MLN): Pakistan’s current account remained in surplus during July-Mar FY21 as it received significant support from workers’ remittances which rose by US$4.5 billion to touch a record level of US$21.5 billion.

Besides, deferred interest payments on external debt through the G20 Debt Service Suspension Initiative (DSSI), curbs on international air travel, and lower global oil prices further improved the current account position during the period under review.

According to the SBP’s third Quarterly Report on “The State of Pakistan’s Economy” for the FY21, these factors were sufficient to offset a widening in the merchandise trade deficit.

The report noted that multiple exporting sectors experienced healthy production activity during the period as overall export receipts were marginally higher than last year's levels based on data reported to the SBP.

Import payments on the other hand rose as the revival in industrial activities and positive business sentiments increased the industrial demand for imported raw materials and capital goods in addition, temporary supply-side bottlenecks in key agricultural commodities also necessitated sizeable one-off imports of these consumer-oriented items, at elevated international prices.

The report further said that the widening of the merchandise deficit needs to be contained to a sustainable level. Greater self-sufficiency in agriculture, through the adoption of better farming and crop management practices, and maintenance of adequate stocks can reduce the need to import commodities such as wheat, sugarcane, and cotton to bridge domestic shortfalls or counter temporary price pressures, it added.

Meanwhile, on the financing side, sufficient inflows from commercial, bilateral, and multilateral sources were supplemented by new inflows under Roshan Digital Accounts, which crossed the US$ 1 billion mark in April 2021. Furthermore, the successful completion of the 2nd-5th IMF reviews unlocked US$ 500 million in direct financing from the Fund. Also, Pakistan re-entered the international capital markets after a gap of over 3 years in early April 2021. As a result, SBP’s foreign exchange reserves rose to a three-year high of US$ 13.5 billion by end-March 2021, and the current account remained in surplus through the first three quarters for the first time since FY04.

The net financial flows into the country dropped to US$ 1.4 billion during July-Mar FY21- a fraction of the US$ 7.4 billion inflows received in the same period last year. As per the report, this sizable reduction was in response to a few major developments. First, the net FX payment pressures in the economy were relatively muted, as the overall current account remained in surplus during the nine-month period. On one hand, this surplus reduced the country's external financing requirements and allowed the government to lower its gross borrowings without compromising the official reserves position. On the other hand, the surplus was reflected in a build-up in foreign assets abroad of Pakistani banks and other entities, which lowered the net financial flows recorded in the balance of payments data.

The second major development was the higher debt and liability repayments by the government and the central bank, which lowered the inflow of loans on a net basis. Third, foreign investment inflows were lower than last year, as a foreign direct investment (FDI) dropped on a YoY basis, while a net outflow was recorded from foreign portfolio investment (FPI). And last, the resumption of the IMF program from Q3-FY21 onwards unlocked around US$ 500 million in direct EFF financing during the quarter and also facilitated the country’s foray into the global capital markets by the end of March’21.

With regards to Foreign Direct Investment (FDI), SBP highlighted that Net FDI to Pakistan dropped 35.1 percent to US$ 1.4 billion during Jul-Mar FY21; investment fell throughout the three quarters on a YoY basis. Similar to last year, the power sector continued to dominate the FDI inflows, accounting for 52.9 percent of the total direct investment that arrived in the country during the period. Nearly half (46.7 percent) of this investment arrived from China, which remained the single-largest source of FDI for Pakistan.

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