Pakistan’s twin deficits – foreign trade and current account deficits – have continued to pose a challenge to economic stability in the country and driven depreciation of rupee against the US dollar and other major currencies in recent days.
In first three months of the ongoing fiscal, the current account deficit surpassed 4.1 percent of the GDP against the projected target of 2 to 3 percent of the GDP by the State Bank of Pakistan.
In monetary term, Pakistan has sustained a hefty current account deficit of USD 3.4 billion during July-Sept period of FY22, whereas during the corresponding period of last fiscal, the current account balance of Pakistan was surplus by USD 864 million.
On average, the country has lost more than USD 1.1 billion every month to current account deficit during the first quarter, something that was shocking for all and sundry in the country. It has ruffled some quite feathers among policy circles, analysts, investors and common people as well.
Trade deficit is among the key reasons of sudden surge in the current account deficit beyond expectations in the first three months of the financial year 2021-22. According to analysts, rising CAD can put the economy in trouble as USD 1 billion monthly deficit could lead to over USD 12 billion CAD in FY22, if this trend continued to prevail throughout the fiscal year.
In the fiscal year 2021, the government was successful in slashing the CAD from USD 20 billion in FY18 to merely USD 1.9 billion in FY21. Nonetheless, the widening deficit was rapidly eroding the country’s record foreign exchange reserves strengthened over the period as the rupee lost 13.4 percent against the US dollar in the last five months due to a high demand of the US currency for imports.
In recent weeks, the foreign exchange reserves of the State Bank of Pakistan have depleted by over USD 1.6 billion for two reasons – repayment of USD 1 billion external loans and unexpected and alarming growth in national imports.
Q1 trade deficit
Another shocking development on the economic front was over 100 percent expansion in the trade deficit in first three months of the ongoing financial year. Pakistan’s trade imbalance mounted to USD 11.66 billion in July to September period of the year 2021-22 as compared to USD 5.81 billion in corresponding period of 2020-21, reflecting 100.62 percent growth.
According to the data of the Pakistan Bureau of Statistics (PBS), imports have increased by 65.08 percent, to USD 18.63 billion in July to September period of FY2020-21 from USD 11.29 billion in the same period of the previous year. Meanwhile, the country’s exports were recorded at USD 6.97 billion in July to September period of the year 2020-21 as compared to USD 5.47 billion in corresponding period of the previous year, showing 27.32 percent growth.
Importantly, the alarmingly high trade deficit has eroded completely the financial or economic benefit of USD 8 billion inflows of remittances sent home by millions of expatriates during July-Sept period of FY22.
Prime Minister’s Adviser on Commerce and Investment Abdul Razak Dawood appears satisfied over the ongoing trends of exports.
In a recent tweet, he said, “Our exports have increased by 27.4% in Sep 2021, to USD 2.41 billion as compared to USD 1.89 billion in Sep 2020.” He further said that for the first quarter (Q1) of FY 2021-22, the exports have increased by 28 percent and surged to USD 6.99 billion as compared to USD 5.47 million in Q1 of FY2020-21. “This has been due to hard work of our exporters & they deserve praise for this accomplishment,” he added.
Rupee depreciation
In recent days, the depreciation of rupee against the US dollar and other currencies has accelerated rapidly. A few months ago, the dollar-rupee exchange rate in the inter-bank operations was fluctuating around 150 to 152 rupees only. But these days, this exchange rate has crossed 174 rupees now as imports and current account deficits surged beyond everyone’s guess in first quarter of the ongoing financial year.
A couple of weeks back, the government put some barriers in the way of the dollar and over-the-expectations growth in imports, but still the prevailing situation is not favourable for rupee, which continues to lose ground almost daily.
A new trend has been noted in the dollar-rupee exchange rate in recent days. The banks and currency exchange companies keep the rate of dollar and other currencies high throughout the day and before closing, they slightly reduce the exchange rate of dollar. In this way, the banks and currency exchange companies are robbing the dollar buyers by artificially keep the exchange rate throughout the day.
Interestingly, neither the State Bank, nor the government have taken any steps to counter this organised financial malpractice in the country.
In the Pervez Musharraf era, when the dollar started showing unwanted upward jumps, the then Governor State Bank of Pakistan, Dr Shamshad Akhtar announced 25 paisa margin of trading in the inter-bank and open market exchange rate of dollar. At that time the central bank strictly enforced that decision and this strategy ended speculations in the market and upward flight of dollar.
These days, there is a gap of about one rupee in the inter-bank and open market exchange rate and this is also a reason of major downward fluctuations in the value of rupee vis-à-vis the dollar. If the same strategy is applied once again, it can help end the ongoing artificial hike in the dollar and other major currencies and keep the markets’ unscrupulous forces from manipulating the exchange rate to fulfil their lust for minting money by hook or by crook.
Encouraging data from September 2021
The State Bank of Pakistan has said the current account deficit declined to USD 1.11 billion in September 2021, against USD 1.47 billion in August 2021. Thus, the current account deficit dropped 24 percent month-on-month basis in September 2021, driven by a 10 percent surge in exports and 2 percent decline in imports.
Exports of goods mounted to an all-time high of USD 2.64 billion in September, up 13 percent when compared with the corresponding month of last year. The projected current account deficit might remain in the range of USD 10-11 billion (3-3.5 percent of GDP) in FY22.
The ongoing rupee slide against the US dollar would discourage imports in the coming months. Measures taken by the State Bank and the government to reduce the import bill are bearing fruit. In Sept 2021, the SBP imposed 100 percent cash margin on the import of 114 items to discourage imports of non-essential goods and support the balance of payments position of Pakistan. With this, the total number of items subject to the cash margin expanded to 525.
Meanwhile, the central bank has also slapped a ban on bank financing for importing cars from Sept 2021 and this policy decision would also slow down car imports in the financial year 2021-22 and this step is expected to lighten the import bill and ease the pressure on national foreign exchange reserves and dollar-rupee exchange rate because vehicles import falls among the leading imports categories in the country.
SBP Governor Dr Reza Baqir had said that given expected resilience in remittances and an improved outlook for exports, the CAD is expected to converge towards a sustainable range of 2-3 percent of GDP in FY22.
The remittances have been still high with an average USD 2.7 billion per month during the current fiscal year while the exports also noted a significant increase, but the CAD crossed the limit calculated by the State Bank and that too within three months.
Meanwhile, the Ministry of Finance in a press statement has stressed the surge in import bill was due to a combination of a few one-off imports and rising global commodities and energy prices.
The ministry said overall the country spent USD 1 billion on vaccines in the first quarter of FY22 which included USD 400 million in September alone. “Therefore, adjustment with vaccines import, the current account deficit for the quarter has reduced to USD 2.4 billion,” it added.
On export front, the trend is increasing on month-on-month basis to USD 2.64 billion in September or 12.5 percent. Similarly, remittances are right on track to reach USD 32 billion in 2021-22. Remittances and exports combined will be in the range of USD 65 billion in FY22.
According to State Bank of Pakistan, a strong rebound in economic activity and higher international commodity prices kept the current account deficit at a high level of USD 3.4 billion in Q1FY22. The CAD expanded on the back of soaring imports, which increased 64 percent year-on-year during the July-September quarter.
The good news is that exports also registered a surge of 35.2 percent during the period while remittances stood strong, soaring to USD 8 billion. During the July-September quarter, oil prices rose from USD 60 to USD 85 per barrel, which inflated the import bill. Moreover, higher non-energy imports coupled with the upturn in global commodity prices further bloated the bill.
Freight and air travel costs also surged significantly on the back of recovery in global demand of consumer items as more and more countries were lifting Covid-19 restrictions.
