Pakistan’s Current Account Deficit Likely to increase by June-2021

December 29, 2020

573

Pakistan recorded a fifth consecutive monthly Surplus of Current Account in November which came out at USD 447 million despite the COVID-19 pandemic, the State Bank of Pakistan declared last week. The success was also shared by Prime Minister Imran Khan, declaring Economic Revival.

MashaAllah despite Covid 19 great news on economy – remarkable turnaround. Current account surplus again in Nov: $447 mn. For fiscal year so far, surplus is $1.6 bn as opposed to deficit of $1.7bn same period last yr. SBP's FX reserves have risen to about $13 bn, highest in 3 yrs
— Imran Khan (@ImranKhanPTI) December 22, 2020

State Bank of Pakistan twitted that in contrast to the previous five years, the current account has been in surplus throughout FY21 due to an improved trade balance and a sustained increase in remittances. SBP Further said that on a cumulative basis, the total current account surplus during the July-November period had increased to a level of US$ 1.64 billion against a deficit of US$ 1.75 billion during the same period last year.

For ascertaining the reason of persistent Current Account Surplus, we need to dig into the data. The main reason for this increase is the fact that Foreign remittances during the five months have shown an increase of 27 percent to US$11.77 billion after returning workers from abroad and COVID-led travel restrictions increased flows through legal channels.

Changing Trade Dynamics

While trade data depicts an interesting trend. During July-November 2020, exports slightly increased by 2.1% to $9.7 billion as compared to $9.5 billion in the same period of last year. Moreover, imports that were declining have started rising again. A pattern indicating restoration of economic activities but also indicating a widening of the trade deficit going onwards. Imports during the July-November 2020 period increased by 1.3% or $247 million to $19.4 billion.

It is evident that Pakistan’s Textile sector is booming, thanks to influx of Foreign Orders and subdued supply from India and Bangladesh due to COVID19 induced lockdown. However, this is expected to change in 2021. With India Opening up the economy and emergency launch of COVID19 vaccine in India expected in early January-2021, it is expected that India will return to normalization sooner than any other country in the region. With massive production facilities of COVID19 vaccines in India and Its focus on catering to the local population first, it will give advantage to the country which will result in trade gains.

Furthermore, with the festive season over, the enhanced Textile demand from US/Europe is now over. Hence, Export dynamics of Pakistan are poised for change in 2021. The Textile companies were already operating at optimal levels, hence no significant growth in Textile Exports is expected going onwards.

Now Coming towards Pakistan’s trade dynamics. Lock-down and other SoPs undertaken by the government led to subdued demand in the economy which resultantly led to lower consumption and lower imports. However, with opening up of the economy, we witnessed a reversal in Imports. As the data suggest, Imports for Fixed Assets/Capital Assets/Machinery is still low. The imports increased for consumer products.

TERF Impact

Here come the decisive factor for Paksitan’s Current Account position in next six months. In its resolve to fight impact of COVID19, SBP launched Temporary Economic Refinance Facility (TERF) for import of machinery at lower rate of 5%. As per latest data from SBP, Approved financing under TERF reached over Rs 222 billion in December-2020. The facility is available for LCs established till March-2021.

With average Lead Time of Capital Goods/Machinery of six months, the majority of machinery under TERF has yet to arrive in Pakistan. With its arrival it is expected that there will be movement in FX Market as the retirement of LCs will put additional pressure on Dollar Demand in the market. With Rs.222 billion ($1.4bn) already approved in TERF and Total TERF facilities Likely to cross Rs. 400bn by its expiry in March-2021, that’s roughly $2.5 billion in additional Import of Capital Goods. Such a huge quantum of Imports wouldn’t have taken place in normal circumstances.

This additional $2.5 billion along with increased LTFF imports are likely to exert pressure on Pakistan’s Import in 2021 and likely to bring down Current Account position.