‘CAD to shrink along with exports, remittances’

Published April 18, 2020
Current account deficit was projected slightly above $6 bn in pre-Covid data, now projected at $4.5bn instead. — AFP/File
Current account deficit was projected slightly above $6 bn in pre-Covid data, now projected at $4.5bn instead. — AFP/File

KARACHI: The current account deficit is set to improve slightly by the end of this fiscal year, according to IMF projections released in connection with the latest Rapid Financing Instrument (RFI). This will happen despite a contraction in imports and a fall in remittances, since the Fund’s projections show that the fall in imports will be even more pronounced.

The current account de­­ficit was projected slightly above $6 billion in pre-Covid data, and is now projected to come in at $4.5bn instead, despite a $1.79bn drop in remittances and a $1.86bn drop in exports. Imports, however, are projected to drop by $3.81bn as the economy actually contracts rather than expands.

With the $1.4bn disbursed via the RFI and follow up inflows from the World Bank and the Asian Development Bank, reser­v­­es are expected to stay clo­­se to $12bn, or equal to finance 2.7 months of imp­orts, by the end of the fiscal year.

The fund warned that a more severe impact of Covid-19 than projected or the authorities’ failure to return to the path of consolidation might put fiscal sustainability at risk.

However, it said that major bilateral creditors’ firm commitment to maintain their exposure in Pakistan, as demonstrated by recent rollovers, will ease pressures on gross financing needs.

China renewed $2bn bilateral deposits in March followed by Saudi Arabia, which also refina­nced $3bn balance-of-payments (BoP) support loans that matured in November-January. The UAE also rolled over $1bn BoP support loans in March.

“These are … critical to reduce gross financing ne­­e­­­­ds to 19.5pc of GDP by FY25, supported also by the authorities’ efforts to improve the maturity structure of debt,” said the IMF.

In addition, the country’s balance of payments position strengthened by the $3.2bn oil facility with Saudi Arabia since 2019.

Recent portfolio outflows from bonds and equities have increased pressure on the local currency, but the fund said that, “Pakistan’s exposure to capital markets is relatively limited, minimising risks.”

In addition to bilateral creditors, official lenders are also advancing their disbursement plans as the Asian Development Bank approved a Special Policy-Based Loan of $1bn in De­­cember 2019, which fur­­­­ther strengthened the BoP.

Published in Dawn, April 18th, 2020

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