Imports shrink, exports stagnate, FDI plummets: Current account deficit drops 27pc

Updated May 22, 2019

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Power  sector took a major hit as the outflows from the sector reached to $281m during the first 10 months against inflows of $1bn in the same period last year.
Power sector took a major hit as the outflows from the sector reached to $281m during the first 10 months against inflows of $1bn in the same period last year.

KARACHI: The country’s current account deficit (CAD) contracted by 27 per cent to $11.586 billion during the first 10 months of the current fiscal year compared to $15.864bn during the same period last fiscal year, according to latest data released by the State Bank of Pakistan.

The contraction is mainly due to 5pc decrease in total imports even as exports have dropped by around 2pc despite devaluation of the local currency and incentives announced by the government. In addition to that, $1.4bn increase in workers’ remittances also helped prop up overall foreign exchange reserves.

The CAD in April declined to $1.24bn, down 45.4pc from $2.275bn in April 2018.

The government has faced challenges to arrest the widening current account deficit despite bilateral borrowings from Saudi Arabia, UAE and China. However, the funds have proven inadequate to finance the CAD as the country’s reserves have declined to $8.8bn — enough for less than three months of import cover due to external debt servicing according to the State Bank.

The rapid decline in reserves forced the government to approach the International Monetary Fund. The fund, after long negotiations, agreed to a 39-month Extended Fund Facility for about $6bn to restore macroeconomic stability and support sustainable economic growth and ensure additional external financing. However, the agreement comes with strings attached including, some say, commitments to roll over bilateral loans, interest rate hike, further devaluation of the currency, and hikes in utility prices including gas and electricity in the upcoming budget.

The agreement with the IMF is likely to be followed by inflows from other lending agencies including the World Bank and the Asian Development Bank.

The CAD, during the last fiscal year, hit record high of $18.619bn depleting reserves at roughly $1.5bn per month stressing government’s ability to payback liabilities.

However, the government’s efforts to compress imports in the ongoing fiscal year are finally bearing fruit as the total imports dipped to $44.033bn, down 7.87pc against the same period last year.

The government introduced corrective measures such as the imposition of regulatory duties and banning furnace oil imports. Furthermore, after introducing new rules governing imports of used vehicles pushing the import bill has downwards during the period under review.

The challenge for the government lies in reversing the declining trend in exports, which have declined 2pc to $20.099bn despite massive devaluation of 18pc in the rupee’s value during the last 10 months and special incentives for export-oriented sectors including textile..

The government had earlier claimed the impact of currency devaluation will be visible in the exports, anticipating a pickup in foreign sales and a steep decline in imports in the months ahead, however, exports have seen no significant improvement.

Foreign investment halves to $1.4bn

As the government embarks on an arduous journey to fix the economic imbalances with the help of International Monetary Fund (IMF) bailout, the foreign direct investment (FDI) halved to $1.376 billion during the first 10 months of this fiscal year from $2.489bn in the corresponding period last year.

The FDI inflows fell to $101.8 million in April, down 42.6 per cent compared to $177.5m in March and plunged by 55.2pc year-on-year compared to $227.5m in April 2018.

Inflows from China, leading investor in the country, declined by 72 per cent to $429m during the July-April period compared to $1.731bn in the same period last fiscal year as major infrastructure-related projects under the China-Pakistan Economic Corridor near completion.

However, the United Kingdom and the United States with $156m and $76m respectively also shied away from investing in the country amid record fall in the rupee’s value and economic slowdown.

On the other hand, investment from Netherlands dropped to $67.5m during the period under review from $86.5m in the same period last year.

Sector-wise, construction led the chart attracting $386.8m during the July-April period of 2018-19 followed by oil and gas exploration, financial business, and electrical machinery with $287.3m, $256.6m, and $287.3m respectively.

Power sector, however, witnessed an outflow of $281m during the first 10 months against $1bn FDI in the same period last year followed by net outflow of $144m in the communication sector.

On a monthly basis, inflows in the financial business and power sector led with $22.1m and $19.8m respectively.

The falling FDI is a troublesome for the government as the inflows from foreign countries help prop up the country’s current account balance which has worsened amid declining exports.

The government, in order to avoid a balance of payments crisis, approached IMF to secure a bailout programme. Moreover, portfolio investment outflow was $990.6m during the period under review compared to inflow of $2.45bn during the same period last year.

Published in Dawn, May 22nd, 2019