KARACHI, March 7: Pakistan posted a current account deficit of $1.066 billion in seven months of this fiscal year i.e. during July 2004-January 2005. In the comparable period of the last fiscal year, the country had seen a trade surplus of $1.93 billion.

According to provisional data released by the State Bank, the current account deficit occurred chiefly because of a huge trade deficit of $2.574 billion in seven months to January 2005, more than 10 times the trade deficit of $209 million in a year-ago period.

The trade deficit has been worked out on the basis of free-on-board value of exports and imports. During July-January 2004-05, exports totalled $8.097 billion and imports stood at $10.671 billion. In a year-ago period, exports had totalled $7.241 billion and imports $7.450 billion. This means that whereas exports grew by only 11.8 per cent, imports shot up by 43 per cent during this period.

Imports have risen phenomenally in first seven months of this fiscal year because of both increased volumes and value of import items including petroleum products, capital goods and machinery, fertilizers and chemicals as well as food items including wheat and sugar.

The current account deficit of $1.066 billion in the first seven months of this fiscal year suggests that the full year deficit may reach $2 billion, particularly because of rapidly growing trade deficit. The State Bank has already projected $4.2-$4.8 billion trade deficit for the current fiscal year and independent analysts say it may rise to even $5 billion.

That would have a negative impact on overall balance of payments as well as on the health of the local currency. Pakistan saw a balance of payment deficit of $612 million during July-January 2004-05. In July-January 2003-04, it had seen a balance of payments surplus of $151 million.

With the current account having crossed the $1 billion mark in the first seven months of this fiscal year and with balance of payments being set to remain negative during the year, there are chances the rupee would weaken.

Currently, the central bank is supporting the rupee by providing dollars for rupees to the banks for onward financing of oil import bills. It had started this process in November after the local currency had come under severe pressure against the dollar. Since then the rupee has recovered part of its lost value and is currently stable around 59.35-59.40 a US dollar, up from 64 a dollar at the end of October 2004.

If the central bank stops dollar selling to banks for financing oil imports, the rupee will immediately come under pressure and will lost part of its strength. If the SBP does this gradually, the impact on the health of the rupee would also be gradual. But keeping the local currency stable in the coming months in the face of growing current account deficit seems difficult. Whereas exports are growing far slower than imports, workers' remittances or foreign exchange sent home by overseas Pakistanis are also rising only nominally.

In seven months to January 2005, the remittances, which are the second largest source of foreign exchange earnings after exports, increased to $2.267 billion from $2.256 billion in a year-ago period.

Foreign direct investment has, however, risen by a higher rate, thanks to privatization of state-run institutions like Habib Bank. In July-January 2004-05, foreign direct investment into Pakistan totalled $516 million, up from $339 million in a year-ago period.