The current account balance recorded a deficit of $773 million during the first month of the current fiscal year (July 2021) compared to a deficit of $1.6 billion in June 2021 and a surplus of $583 million in July 2020.
“This deficit is in line with SBP’s expectations of a current account deficit of 2-3 percent of Gross Domestic Product (GDP) as economic activity continued to progress,” the State Bank of Pakistan (SBP) said on its official twitter account.
It added that despite the recent increase in current account deficit, the SBP’s foreign reserves position continued to strengthen on a monthly basis.
“This is in contrast to past trends and is supported by the country’s market-based exchange rate system,” the central bank added.
According to data released by the SBP, exports of goods and services were higher compared to July 2020 as they rose to $2.74 billion in July 2021 from $2.34 billion in the same month of the previous year.
The increase in current account deficit was mainly attributed to higher imports during the month. However, some of the major imports were seasonal such as COVID vaccine or heavy machinery to be used in industrial units in the country.
The level of current account deficit is not only lower compared to that in the previous government but its nature is also different from the past when the deficits were driven by an unsustainable consumption boom. Whereas in FY21, imports of capital, such as machinery made more of a contribution to the import bill, which bodes well for future growth.
A current account deficit is normal for a country like Pakistan where saving is low and which is undergoing a growth recovery. Two things are important: that it not be too large, and that the country is able to finance it without losing foreign exchange reserves.
Pakistan’s market-based exchange rate system introduced in June 2019 will help ensure the current account does not become unsustainable like in the past.
This mechanism did not exist in the past. Instead, the exchange rate was kept at an artificial level, such that the current account deficit kept growing and precious foreign exchange reserves were depleted to pay for imports and the country was forced to go to the International Monetary Fund (IMF).
At over $17 billion, Pakistan’s foreign exchange reserves have risen to a 4.5 year high in June. They rose by $5.2 billion during FY21. Conversely, during FY17 and FY18, they fell by $2 billion and $6.4 billion, respectively.
Data showed that the CAD without official transfers expanded to $827 million compared to the surplus of $565 million in the same period of the previous year.
In addition, the trade deficit in goods expanded from $1.672 billion in July 2020 to $3.14 billion in July this year.
The trade deficit in services however narrowed to $232 million in the corresponding month as compared to the deficit of $315 million in July 2020.
Similarly the workers’ remittances edged down to $2.707 billion in July this year compared to $2.764 billion in July 2020.
As a percentage of gross domestic product (GDP), the current account balance witnessed a deficit of 2.8pc in July 2021 as opposed to a deficit of 2.4pc in the same period of the previous year.