C/A deficit shrinks to 10-year low of $1.9bln in FY21

KARACHI: Current account (C/A) deficit narrowed to a 10-year low in FY2020-21, latest data showed on Monday, as higher exports and remittances offset hefty import payments.

The deficit reduced 58 percent to $1.9 billion in July-June FY2021 from $4.4 billion a year ago. The current account gap represented 0.6 percent of gross domestic product in FY2021, the smallest share since FY2012.

The deficit is in line with the State Bank of Pakistan’s (SBP) projection. It had forecast the current account gap to be in the range of 0.0-1.0 percent in FY2021. The current account deficit showed an improvement, despite a higher trade gap. This improvement is attributable to an upsurge in remittance flows and rise in exports.

The country’s trade deficit widened 32.9 percent to $30.8 billion last year. The SBP’s figures showed exports of goods rose to $25.630 billion in FY2021 from $22.536 billion a year earlier. However, imports increased to $53.785 billion from $43.645 billion.

Remittances from Pakistani workers employed abroad jumped 27 percent to $29.4 billion. Pakistan’s external position is at its strongest in many years, said the SBP in a tweet. This is because of increasing exports and remittances at all-time highs. The SBP’s foreign exchange reserves rose by $5.2 billion in FY2021 to over $17 billion, a 4.5 year high, it added.

In June, the current account deficit widened to $1.6 billion from $650 million in May. It came at $121 million in the same month of FY2020. The increase in the June current account deficit was due to higher imports, which stood at $5.322 billion in FY2021, compared with $3.560 billion in the corresponding month of the previous year. “Some of the rise in imports was seasonal, associated with bunching of year-end payments. Import bill was also larger than May due to higher oil imports and Covid vaccines,” said the SBP’s tweet.

“Encouragingly, import of capital goods like machinery continued to rise, reflecting improvement in investment outlook.” Today’s figures reinforce a cautious outlook for the balance of payments, and the current account deficit to further widen owing to a rise in imports.

The higher oil prices are expected to push the import payments up. The ongoing rising trend in global non-energy prices could also put pressure on the import bill. The capital goods imports are expected to increase in the wake of the significant borrowing under the Temporary Economic Refinance Facility, according to SBP’s third quarterly report released last week.