It comes following slowdown in receipt of export earnings, worker remittances
KARACHI: Pakistan’s current account deficit – the gap between foreign expenditures and income – widened to a four-month high at $1.425 billion in May 2022 following a slowdown in inflow of export earnings and workers’ remittances.
The current account deficit of $1.425 billion was 2.2 times higher than the deficit of $640 million recorded in May 2021. It surged 2.3 times when compared with the current account gap of $618 million in the previous month of April 2022, the central bank reported on Tuesday.
Cumulatively, in the first 11 months (July-May) of current fiscal year, the current account deficit spiked almost 13 times to $15.199 billion compared to $1.183 billion in the same period of last year.
“Decline in remittances and exports on account of Eid holidays contributed to this rise (to $1.425 billion in May),” the State Bank of Pakistan (SBP) said on its official Twitter handle. On the other hand, the “overall imports fell compared to April,” it said.
“Excluding in-kind imports (like Covid-19 vaccines and import of petroleum products on deferred payments) that are fully financed and thus do not undermine sustainability of CAD (current account deficit), the deficit was more modest at $1 billion,” the central bank said.
The current account deficit at $15.199 billion in 11 months has already surpassed the central bank’s projection of $14 billion (or 4% of gross domestic product – GDP- as per old base of economy) for the full current fiscal year.
“We expect CAD in the range of $800 million to $1 billion in the last month (June) of current fiscal year,” Arif Habib Limited (AHL) Head of Research Tahir Abbas said while talking to The Express Tribune. With that, the current account deficit for the full fiscal year would swell to around $16 billion (or over 4% of GDP as per new base of economy), he projected.
“The elevated current account deficit in May is in line with the market expectations … in the range of $1.25-1.50 billion,” he said.
In addition to the drop in remittances, “the purchase of four expensive LNG cargoes from the global spot markets to meet growing domestic demand for energy … widened the current account deficit in May.” The drop in remittances sent home by overseas Pakistanis was expected as the inflows usually decreased in the months between Eidul Fitr and Eidul Azha, he said.
Non-resident Pakistanis sent record high remittances of $3.12 billion in April ahead of the fasting month of Ramazan and Eidul Fitr. They fell 25% (or $792 million) to $2.33 billion in May compared to April. Historical trends suggest the remittances improve again and reach close to the year’s high or hit a new record high in the month before Eidul Azha (which is expected to fall on July 10).
“We expect increase in remittances in June compared to May. This will be one of the reasons for the expected reduction in CAD in June compared to May,” Abbas said.
Exports of goods dropped 21% to $2.48 billion in May compared to $3.15 billion in April. Imports of goods dropped 6% to $5.66 billion in May compared to $5.99 billion in Aril.
Real Effective Exchange Rate
The rupee, however, strengthened 0.52% (or Rs1.07) on a day-to-day basis to a two-week high at Rs206.87 against the US dollar in the inter-bank market on Tuesday after the IMF officially communicated its initial agreement (MEFP / Memorandum of Economic and Financial Policies) to the government for the revival of its multibillion-dollar programme.
“After the latest recovery in the rupee against the US dollar … real effective exchange rate (REER) – the value of domestic currency against a basket of currencies of global trading partners – is projected to have dropped to a three-year low at around 90 on the REER index at present (June 28, 2022),” Abbas estimated.
The State Bank of Pakistan (SBP) reported on its official Twitter handle on Tuesday the “REER index fell to 93.57 in May, a decline of 2.4% compared to April.”
The drop in REER is considered good for economies like Pakistan as it supports exports and discourages imports. REER has largely been maintained around 95-97 on the index between June 2021 and Aril 2022.
The analyst projected that the rupee may return to somewhere between Rs195 and Rs198 against the greenback once the IMF gave final approval for the revival of its loan programme. The IMF will release the next tranche of its loan worth $1.9 billion after its executive board’s approval.
Courtesy : Express Tribune