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Current account deficit widened 2.6 times in July-March

Updated April 20, 2017

KARACHI: The current account deficit for the first nine months of 2016-17 rose to $6.13 billion, which is 2.6 times higher than the deficit recorded a year ago.

The deficit in July-March is double the negative current account balance recorded in 2015-16, the State Bank of Pakistan (SBP) reported on Wednesday.

Experts say the large current account deficit was expected. Pressure is mounting on the external front due to a number of factors that are slowing down the inflows of dollars.

The current account deficit was $2.35bn in July-March of the preceding fiscal year, SBP data shows. In 2015-16, the deficit was $3.39bn.

The main cause of the alarming increase in the current account deficit is an all-time high trade deficit of $23bn in July-March. It has put enormous pressure on dollar holdings of the country. It has also shattered the balance between inflows and outflows of foreign exchange.

The government is trying to downplay the negative impact of massive imports, which included luxury and food items. It said higher machinery imports will ultimately increase exports.

However, the government is giving no timeline for the expected improvement in exports.

Independent economists have been warning that a large current account deficit will mar the country’s ability to pay back its loans. It means the bonds’ rating will further drop in the international market. The government borrowed over $900 million from commercial banks in the first half of the fiscal year at a high rate of return. It is planning to launch more eurobonds to raise dollars.

If the trend persists in the next three months, the current account deficit will reach $8bn by the end of 2016-17, casting doubt on the country’s ability to meet its foreign obligations.

Foreign exchange reserves of the country slipped to $21.7bn from $24bn in October 2016, reflecting the impact of increasing outflows.

Exports remained $16bn in the nine months, registering little change over the past year. Imports rose to $33.8bn after adding more than $4bn over the preceding year.

The deficit in March was more than half a billion dollars against $822m in the preceding month. Data from past years shows the deficit widens in the last quarter of the fiscal year. This can be challenging for the government, which is likely to issue bonds in the international markets.

The government failed to attract foreign investors in the nine-month period. Foreign direct investment (FDI) grew 12pc, although the size of inflows remained small compared to foreign investment that neighbouring countries received over the same period. FDI in July-March was just $1.6bn.

Published in Dawn, April 20th, 2017