CA declines sharply 32 pc in FY19

Islamabad, July 17, 2019: Pakistan’s current account deficit declined sharply 32 percent during the last fiscal year (FY19) due to regulatory reforms to cut the import bill.

According to State Bank of Pakistan (SBP), Pakistan current account deficit was $ 13.587 billion in FY19 compared to $19.897 billion in FY18, showing a declined of $ 6.31 billion.

SBP said that the external account continued to improve as the year progressed. Contractions in import payments for both goods and services were the primary factors and were supported by decent growth in worker remittances. These factors cumulatively offset the higher primary income deficit and a decline in export receipts. As a result, the current account deficit for Jul-June FY19 declined 32 percent.

As the year went on, the merchandise import payments further dropped with tapering demand for imported power generation and electrical machinery, following the conclusion of early harvest CPEC projects. Furthermore, purchases of aircraft and related parts from abroad that inflated last year’s imports, normalized this year.

Meanwhile, the overall slowdown in economic activity in the wake of macro adjustment policies and regulatory measures curbed the import demand for raw materials for construction and auto industries. Also, quantum-led drops in import payments for both POL products and crude oil in the third quarter pulled down energy imports for the first time since Q1-FY17.

However, SBP said that despite the higher remittances and the resultant reduction in the current account gap, the size of the deficit is still quite large. And this gap could not be filled by foreign investment. As a result, the country had to resort to bilateral and commercial sources for external financing; most of these inflows were realized in the third quarter.

With elevated current account deficit and the precarious foreign exchange reserves position, these inflows proved insufficient to completely calm down forex market sentiments. As a result, the Pak Rupee depreciated sharply against the US dollar.

The average CAD between FY11-15 was US$ 2.6 billion only, while this number is $ 13.5 billion in Jul-June FY19.

The sizable decline in machinery imports following the conclusion of early phase of CPEC, lower quantum energy imports (excluding LNG) amid lower power generation in Q2 and Q3, and a temporary softening in global oil prices, all contributed significantly to improvement in the current account deficit by lowering of import payments, the SBP said.

Nonetheless, despite the improvement in the current account deficit, its management remains challenging, especially when exports and foreign investments did not show corresponding increases.