KARACHI: The country’s current account deficit (CAD) swelled to 4.1 per cent of GDP in the first quarter exceeding the 2-3pc range projected by the State Bank of Pakistan (SBP) for 2021-22.

However, the CAD narrowed 24 per cent to $1.113 billion in September from $1.473bn in the preceding month.

The rising import bill kept the exchange rate under pressure and the dollar once again appreciated by 69 paisa for the closing price of Rs173.47 on Wednesday. Currency dealers said the dollar was traded at Rs174.30 in the open market.

While announcing the monetary policy in July, SBP Governor Dr Reza Baqir had said that given expected resilience in remittances and an improved outlook for exports, the CAD is expected to converge towards a sustainable range of 2-3pc of GDP in FY22.

Dollar climbs to Rs173.47 on Wednesday

The country posted a CAD of $3.4bn (4.1pc of GDP) in July-September period against a surplus (1.2pc) in the same quarter last fiscal year, reported the SBP on Wednesday.

The remittances have been still high with an average $2.7bn per month during the current fiscal year while the exports also noted a significant increase, but the CAD crossed the ‘limit’ calculated by the State Bank and that too within three months.

The miscalculation could put the economy in deep trouble as $1bn monthly deficit could lead to over $12bn CAD in FY22. Reports appearing in media suggest that the government is planning to borrow $3.5bn through launching bonds in the international market in order to bridge the gap.

The government had succeeded in bringing down the CAD from $20bn in FY18 to $1.9bn in FY21, but now the surging deficit could erode the country’s record foreign exchange reserves built over the period as the rupee also lost 13.4pc against the US dollar in the last five months due to a high demand for the greenback from the importers.

The narrowing down in September could be an encouraging sign for the government, but the trade deficit, which is the key reason for ballooning CAD, remained on the higher side.

A number of steps taken by the government and the SBP have so far failed to reduce the import bill. The latest data showed the trade deficit in goods doubled to $10.232bn in 1QFY22 against $5.283bn in the same period of last year. The balance on trade in services recorded a deficit of $717m in 1QFY22 against a deficit of $533m in 1QFY21.

Meanwhile, the Ministry of Finance in a press statement stressed that the the surge in import bill was due to combination of few one-off imports, rising global commodities and energy prices.

The ministry said overall the country spent $1bn on vaccines in the first quarter of FY22 which included $400 million in September alone. “Therefore, adjustment with vaccines import, the current account deficit for the quarter has reduced to $2.4bn,” it added.

Moreover, the sudden surge in import bill is function of abnormal surge in commodity prices. Energy prices including oil, LNG or coal prices are following upward trend. While, chemicals, steel and food prices are also on rise. “We expect supply bottlenecks of above-stated items will streamline in the months to follow. This will further reduce pressure on import bill.”

On export front, the trend is increasing on month-on-month basis to $2.64bn in September or 12.5pc. In the first quarter, exports recorded at $7bn. It is expected that exports will be close to $31bn and $6-7bn services exports in June ending 2022. Similarly, remittances are right on track to mark $32bn. Remittances & exports of goods & services combined will be in the range of $70bn in FY22.

Lastly, due to better crop outlook, the import of sugar, wheat & cotton will witness massive slowdown during the second half of fiscal year. This will further reduce the import and inturn, current account deficit.

Published in Dawn, October 21st, 2021