KARACHI, Sept 14: Pakistan’s current account deficit shot up to $447 million in July 2005, the first month of this fiscal year, fuelling fears that the external account may remain under pressure throughout the year.
The latest data released by the State Bank show that the current account deficit shot up to $447 million in July 2005 from only $29 million in July 2004. What worsened the current account was a sharp increase in both trade and services accounts.
The trade deficit rose to $584 million in the first month of this fiscal year from $359 million a year ago. The services account also witnessed a huge deficit of $228 million during July 2005 up from $159 million in July 2004. The trade deficit increased as imports grew faster than exports due to several reasons including an increase in both the quantity and price of imported petroleum products. Oil import bill grew on the back of a dramatic rise in international oil prices coupled with higher demand for fuel in the growing domestic economy.
Pakistan had to spend $368 million in July 2005 on imports of POL products. A year earlier, it had imported $346 million worth of POL products. In July this year, it was not POL products, however, that exerted maximum pressure on the trade account. More than anything else, machinery imports of $502 million up from $320 million a year earlier, worsened the trade account in July this year.
Pakistan’s current account had seen a deficit of $1.53 billion in the last fiscal year and the policy makers have forecast $2.7 billion deficit during the current year, assuming that the trade deficit will remain around $4.2 billion. But the Asian Development Bank said in its latest report on Pakistan that the current account deficit might rise to $3.5 billion during this fiscal year primarily due to soaring international oil prices that is bound to make imports bill fatter.
In addition to an increase in trade and services account deficits, what else worsened Pakistan’s current account in July this year, is that unlike in the last year, the country received lesser amount of foreign exchange from overseas Pakistanis, and foreign currency deposits of resident Pakistanis also showed a slower growth. During July 2005, overseas Pakistanis sent home $313 million, down from $330 million in July 2004. And, resident foreign currency deposits grew by just $14 million in the first month of this fiscal year, down from $99 million a year earlier.
Whereas the slower growth in resident foreign currency deposits shows increased confidence of the depositors in the rupee health, the fall in remittances from overseas Pakistanis indicates a pickup in informal transfer of foreign exchange into Pakistan through hundi or hawla.
The State Bank has recently taken action against several foreign exchange companies for violating rules that had a negative impact on formal inflows of remittances from overseas Pakistanis, in one way or the other. Data on these remittances for August would be out later this week. So it is difficult to say whether the steps taken by the central bank have resulted in an increase in workers’ remittances.
