Current account deficit shrinks by 75% in FY20

Current account deficit shrinks by 75% in FY20

Pakistan posted a deficit of $367 million compared to a deficit of $364 million in November, showing a marginal increase. However, compared to December 2018, $1.514 billion saved which shows 80.49 percent improvement.


On quarterly basis the deficit improved by $3.666 billion or 84.72%, clocking in at $661 million in Q2 of FY20 compared to $4.287 billion in Q2 of FY19

Pakistan’s current account deficit of first six months of the fiscal year 2020 stood at $2.153 billion compared to $8.614 billion from the corresponding period of last year, showing an improvement of $6.461 billion or 75 percent.

During the month of December 2019, Pakistan posted a deficit of $367 million compared to a deficit of $364 million in November, showing a marginal increase. However, compared to December 2018, the deficit improved by $1.514 billion or 80.49 percent, data released by the State Bank of Pakistan.

On quarterly basis the deficit improved by $3.666 billion or 84.72%, clocking in at $661 million in Q2 of FY20 compared to $4.287 billion in Q2 of FY19.

The trade deficit in goods improved by 39.40 percent to $9.818 billion in the first 6 months of FY20 as exports improved by 4.46 percent to $12.391 while imports decreased by 20.86%.

Trade balance in services, while still negative, also improved by 17.51 percent courtesy of a 4.69 percent reduction in imports while the exports increased by 6.12 percent.

Worker remittances in the first half of FY20 improved by 3.32 percent to $11.395 billion from $11.029 billion in the corresponding period of FY19.

Meanwhile, International Monetary Fund (IMF) projected that Pakistan’s current account deficit (CAD) would narrow to 2.4 percent in ongoing fiscal year due to the reduction in trade deficit.

The IMF in its recent report on Pakistan economy estimated that Pakistan’s CAD would reduce to 2.4 percent of the GDP in current fiscal year as against 4.8 percent of the GDP in previous financial year. Earlier, the Fund had projected the country CAD at 2.6 percent for the year 2019-2020. However, the IMF had downward its estimate to 2.4 percent after CAD had reduced by around 74 percent in first quarter of the present fiscal year.

On the completion of first review of Pakistan’s economic performance, IMF has acknowledged that Pakistan’s reform program is on track and already producing results, said the finance division in a statement here Sunday.

According the Division, the IMF report acknowledges that the business climate has improved, and market confidence is returning. IMF further adds in its assessment that the Government recognizes that structural reforms, especially in SoE sector to revive economic activity and growth.

The report has confirmed that End-September performance criteria (PCs) were observed with wide margins. These include, Zero budgetary borrowing from SBP, Primary budget deficit ceiling, Ceiling on government guarantees, Zero external public payment arrears, SBP net international reserves (NIR), net domestic assets (NDA), and swaps/forwards targets all met. In addition to above, all structural benchmarks (SBs) for end-September, except the SB on AML/CFT, were completed, said the statemen

With regard to inflation outlook, IMF has lowered Inflation projection for FY20 to 11.8%, down from 13% earlier on account of this fact that the administrative and energy tariff adjustments are expected to offset the effects from weak domestic demand. Thereafter, inflation is expected to converge to 5-7%.

The report confirms that inflation has been started to stabilize, along with core inflation, and the SBP stance is appropriate (no need for further rate hikes).

However, we are of the view that we will do much better than IMF projection, the finance division claims. As inflation during Jul-Nov was 10.8% and with measures taken we target to bring inflation down to 5% over the medium term.

With regard to the external sector, significant improvement has been witnessed. Overall, Current Account Deficit (CAD) shrunk by almost two-thirds (74%) in the Q1 FY 20 compared to the same period of FY 2019. CAD is projected to decline to 2.4% of GDP in FY20 (4.9%), which is lower than earlier IMF forecasts of 2.6%.

Total imports fell by 23% y-o-y in Q1 of FY2020, but imports of machinery and equipment were more resilient, rising about 2 % y-o-y. Exports are showing some sign of recovery, up 2% y-o-y for the same period with 17% volume growth, mainly driven by food and textiles.

The report states that transition to a market determined exchange rate has allowed the rupee to find its new equilibrium quickly, thereby, successfully correcting the ‘exchange rate overvaluation’ of the last 5 years.

The report has also acknowledged strong Fiscal performance in the First Quarter of FY2020 while stating Primary surplus of 0.6% of GDP and an overall deficit of 0.6% of GDP, about 1% of GDP better than programmed.

In addition, Tax revenue growth was in double-digits (net of refunds) even though customs receipts and other external sector related taxes have suffered due to import compression.

Ceiling on NDA of SBP (Performance benchmark) has been enhanced to Rs 9.1 trn (8.7), an increase of Rs339bn in FY20.This is positive for growth and will be utilized for concessional financing for the export industry. Ceiling on government guarantees has been enhanced to Rs 1.8trn (1.6), an increase of Rs 252 billion in FY20. This is positive for growth and will allow government to settle the outstanding stock of circular debt. Floor on FBR tax collections for FY20 has been revised lower to Rs 5.2trn (5.5), due to strong improvement in non-tax revenue. During H1 Fy20, government non tax revenue collection has hit Rs 878 billion which is 75% of full year budgeted collection of Rs 1.16 trn.


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