KARACHI: Pakistan’s current account deficit in the first two months of 2015-16 remained $394 million, according to data released by the State Bank of Pakistan (SBP) on Friday.
The current account deficit shrank by over a billion dollars ($1,062 million) year-on-year (YoY) in July-August as it amounted to $1.45 billion in the same two-month period of the preceding fiscal year.
The notable improvement in the current account balance in the last two months was mainly because of shrinking trade deficit in both goods and services.
A deficit or surplus reflects whether a country is a net borrower or lender of capital with respect to the rest of the world.
As a percentage of gross domestic product (GDP), the current account deficit dropped from 3.2% in July-August 2014 to 0.8% in July-August 2015.
The country recorded a current account deficit of $2.28 billion in the last fiscal year, which was significantly smaller than the deficit of $3.13 billion in 2013-14. Analysts believe the encouraging trend in the country’s current account balance in the recent past is a consequence of major inflows under the Coalition Support Fund (CSF), substantial growth in worker remittances and a sharp reduction in the oil import bill.
Imports and exports
Pakistan’s total imports of goods in July-August were $6.69 billion as opposed to $8 billion in the same months of the preceding fiscal year, which shows an annual decrease of 16.5%.
Pakistan exported goods worth over $3.5 billion in July-August as opposed to the export of goods valuing over $3.78 billion in the same months of 2014, reflecting an annual decline of 6.8%.
The overall balance of trade in both goods and services stood at $3.4 billion in July-August. This reflects an improvement of $1.3 billion on a YoY basis, as a deficit of $4.7 billion was recorded in the balance of trade in both goods and services during July-August 2014.
Worker remittances were $3.1 billion in July-August, up 5.4% from the same months of last year. Remittances have played a significant role in improving the country’s external sector, as they make up for almost 48% of the country’s import bill and cover more than 93% of the deficit in goods and services accounts.
According to KASB Securities analyst Sarah Mazhar, current account is expected to remain balanced in 2015-16. She says a ‘minor’ surplus of $0.3 billion can be expected in the current fiscal year given savings of $3.5 billion in oil imports.
The average landed price of oil in the last fiscal year was $85 per barrel. KASB Securities estimates the oil price will average $57 per barrel onwards, giving considerable room for oil import savings.
However, Mazhar says trade deficit continues to face potential risk from two major drivers, namely international commodity prices and Pakistan’s lower export competitiveness following the rupee’s appreciation against the dollar.
In the latest monetary policy statement, the SBP noted that a current account deficit of the size of end-fiscal 2015 “seems manageable” in 2015-16. “This is supported by the expected surplus in the capital and financial account in 2015-16 on the back of planned Euro/Sukuk bond inflows, official disbursements and the remaining IMF funding under the EFF programme,” it said, adding that the lower global oil prices have yet to find their bottom.