Huge drop in Pakistan’s current account deficit

KARACHI: Pakistan’s current account deficit (CAD) dropped precipitously by a shocking 78% to $400 million in December 2022, demonstrating that the government is regaining control of the situation regarding the balance of international payments.

In the same month last year, the country’s CAD—the discrepancy between its high foreign expenses and low income—was $1.86 billion, according to data released by the State Bank of Pakistan (SBP) on Wednesday.

However, the decline in the deficit came at the expense of growth as economic activity slowed down in the reviewed month. The amount of export revenue, import payments, and worker remittances received all fell sharply.

As foreign exchange reserves have fallen, the government’s administrative controls on imports have caused several industries to shut down completely or partially. As a significant share of imports are produced by export businesses like textile producers, the circumstance also had an influence on export revenues.

Additionally, the government’s control over the rupee-dollar exchange rate in the interbank market has been a major factor in the diversion of export proceeds and worker remittances to black marketplaces known as Hawala-hundis that offer better exchange rates.

In all, CAD decreased by 60% to $3.66 billion in the first half of FY2023, from July to December, from $9.09 billion in the corresponding period of FY2022.

SBP Governor Jameel Ahmed refuted claims that the institution is pumping US dollars into the interbank market to control the rupee while speaking to Karachi’s business sector during the day. “Time has changed, and now only exports and worker remittances are used to support imports.” The nation now has $4.3 billion in foreign exchange reserves, which covers three weeks’ worth of imports.

However, the business community criticised the actions of the government and central bank, blaming administrative constraints for shutting down enterprises and jeopardising jobs in the nation.

The CAD has continued to be lower than the target, according to Samiullah Tariq, Head of Research at Pak-Kuwait Investment Company. In contrast to the central bank’s prediction of 3.5% (about $10 billion) for the year, the December CAD amount of $400 million indicates that the full-year CAD will remain noticeably low at $7 billion in FY23, according to Tariq.

However, he asserted that given how hard the foreign exchange issue is impacting the economy, the government should step up attempts to restart the suspended International Monetary Fund (IMF) loan programme.

The program’s resurrection will also release billions of dollars in finance that other international and bilateral creditors have offered. At the Geneva meeting last week, the international community promised Pakistan roughly $10 billion in flood relief. The funding will not only ease the country’s financial difficulties but also afford it some time to address the economy’s underlying problems and achieve sustainable economic growth.

He predicted that the economy will continue to sputter in the final six months of FY2023, from January to June. Business and economic activity will begin to pick up in July 2023, when the next fiscal year begins.

However, compared to the same period last year, when imports totaled $36.09 billion, they fell by 18% to $2.51 billion in the first half of FY23. Additionally, exports fell 7% to $14.21 billion in the first half of the year from $15.24 billion in the same period last year.

Additionally, worker remittances decreased by 11% to $14.05 billion in the first half of FY23 from $15.80 billion in the corresponding period of FY22.