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August 21, 2019

C/A gap narrows in July on improved trade balance

Business

August 21, 2019

KARACHI: Current account deficit sharply narrowed in the first month of fiscal year 2019/20 as the country’s merchandise trade deficit contracted and remittances from expatriate Pakistanis rose, the central bank data showed on Tuesday.

The State Bank of Pakistan (SBP) said the current account deficit narrowed 72.81 percent to $579 million in July, compared with $2.130 billion in the same period last year.

The SBP data showed imports dropped 25.8 percent to $4.080 billion because of slowdown in non-energy and luxury imports. Exports rose 11 percent to $2.233 billion in July FY20 from $2.012 billion a year earlier.

The trade deficit is offset by private transfer receipts, mainly remittances sent back home by Pakistanis employed overseas. Remittances to Pakistan rose to $2.039 billion in July from $1.981 billion a year ago.

Pakistan’s struggling economy is heavily reliant on foreign inflows to finance gaping current account and budget deficits that have widened in recent years as tax revenues and foreign investments stalled, mainly over weak economic growth and policy uncertainty.

Current accounts track a country's net international trade and foreign investments. Analysts attributed the drop in the deficit also to the impact of currency devaluation. The central bank let pared rupee value as part of an IMF-backed bail-out package signed last month.

However, the rupee shed more than half in value since last year, helping to cut the trade deficit and attract foreign investment that had dried up in recent years. They said the macro adjustment policies undertaken since December 2017, including exchange rate adjustments, cuts in development spending, interest rates hikes and regulatory measures helped narrow the current account gap.

Though, Pakistan Bureau of Statistics didn’t release July’s trade numbers, media reports said trade deficit shrank 29 percent to $2.27 billion in the first month of this fiscal year. Nonetheless, a fall in oil prices may provide relief to the balance of payments position.

Analysts said the contraction in current account deficit is a very healthy sign given the elevated deficit was a source of vulnerability for the country’s economy.

The government is projecting the deficit to reduce further in FY20, on the back of an expected better export performance, containment of import payments, and continued momentum in workers’ remittances.

However, global economic slowdown could hamper the country’s exports and impede remittance inflows. Pakistan’s foreign exchange reserves rose 3.7 percent to $15.577 billion as of August 9.

Foreign reserves held by the State Bank of Pakistan (SBP) increased $535 million to $8.264 billion following the inflow of $500 million from Asian Development Bank.

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