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Current Account Deficit Widens; Economic Stability in Question

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The current account deficit of Pakistan surges to 4.7pc of GDP

What is a Current Account Deficit?

A current account deficit means a country is importing more than it is exporting. When a country increases the value of its exports relative to the value of imports. So it can reduce its existing debt. A country can reduce its current account deficit by restrictions on imports, such as tariffs or quotas, or promote export. The country can also use monetary policy to improve the domestic currency’s valuation relative to other currencies through devaluation, which reduces the country’s export costs.

The current account deficit of Pakistan surges to 4.7pc of GDP According to the State Bank of Pakistan data, the current account deficit was higher than September, and it also increases in terms of GDP from 4.1 per cent to 4.7pc. There is a negative impact of the increasing deficit on foreign exchange reserves and exchange rate regime and resulted in fall of rupee value by 13.4pc during the current financial year. In October, the current account deficit increased by $1.663bn in terms of dollars. The reason for the current account deficit is the growing size of imports. The State Bank of Pakistan data shows, the imports in July-October went up by 66.3pc to $23.48bn against $14.118bn recorded in the same period of FY21.
In the month of October, the imports of goods went higher by $6bn due to the failure of policy measures taken by the Central Bank and the government. After increasing the current account deficit it created pressure on the exchange rate as the local currency lost 13.4pc against the US dollar during FY22. The foreign exchange reserves of the State Bank
of Pakistan declined by over $2.2bn to $16.9bn since October, 1 and creating the poor reserves’ situation. In the month of September, the current account deficit was $1.113bn compared to $1.473bn in August. It was 24.48% lower than the deficit recorded in the month of August.

Current account deficit of Pakistan

In Sep 2021, Pakistan’s current account deficit is 3.4 USD bn compared with a deficit of 2.5 USD bn in the previous quarter. According to the State Bank of Pakistan (SBP), the current account surplus is $865 million in the corresponding quarter of the previous year. The State Bank of Pakistan stated in a tweet, that higher International commodity prices kept the current account deficit at a high level of $3.4 billion in Q1FY22. Further, Arif Habib Corporation Managing Director and CEO Ahsan Mehanti said that the primary reason behind increasing the current account deficit was the lofty import bill. “From July to September, oil prices increase from $60 to $85 per barrel, which inflated the import bill.” During July-September 2021, “Textile exports increased 27% to $4.4 billion. According to Central Bank, the current account deficit narrowed to $1.11 billion in August 2021. According to Arif Habib Limited’s report, the current account deficit dropped 24% month-on-month in September 2021, driven by a 10% surge in exports and a 2% contraction in imports. Furthermore, Director Research Atif Zafar said that the current account deficit would stay in the range of $10-11 billion (3-3.5% of GDP) in FY22.

The SBP imposed a 100% cash margin on the import of 114 items in the last month, to discourage imports of these goods and support the balance of payments. According to Tariq, when commodity prices maintain in the International market, Pakistan’s import bill will contact, so it will reduce the current account deficit.

Current Account Deficit VS Trade Deficit:- An Overview

The current account deficit means the country sends more money to sources abroad than it receives from sources abroad. On the other hand, the trade deficit or surplus reflects the total value of all goods exported and all goods imported. The U.S. has the world’s largest current account deficit at the end of 2020, while China has the world’s largest current account surplus.

Current Account Deficit

The current Account balance may be either a deficit or a surplus, it depends on its total receipts from other countries are less than or greater than its total payments to other countries. When country sends more money abroad than it receives from abroad so current account deficit occurred. But when country receives more money from abroad than it sends, so it has a current account surplus.

Trade Deficit

The trade deficit or surplus is the largest component of its current account balance. It is the total value of its trade with foreign countries. When country exports more than it imports, so it is trade surplus, but it imports more than it exports, so it will have a trade deficit. Countries can manage their trade deficit by two ways:- First one is to borrow money or second is to raise taxes to make up for the shortfall.

Trade Balance VS Current Account Of Pakistan

The trade deficit has risen sharply and stood at $20.7 billion from July to November period of the current fiscal year. Pakistan’s trade balance increases to $5.11 billion in November 2021 against $1.94 billion in the last year of 2020. The trade deficit in five months of FY2022 went up by 117 percent. In October 2021, the trade deficit stood at $3.87 billion as exports stood at $2.7 billion and imports $6.33 billion. Top officials of the Finance Minister shared the data of imports, it shows that the import of food items were $911 million, energy, including POL products and RLNG $2.4 billion, 2.2 billion dollars raw material, machinery $1.14billion and Covid-19 vaccine $621 million in November 2021. Pakistan current Account Balance from March 1976 to Sep 2021, with an average value of -417.3 USD mn. The State Bank of Pakistan provides Current Account Balance in USD. Pakistan Foreign Direct Investment (FDI) increased by 167.6 USD mn in Sep 2021. Likewise, In Sep 2021, Pakistani Direct Investment Abroad expanded by 879.0 USD mn. And Country’s Nominal GDP was reported 264.1 USD bn in Jun 2020.

Current Account deficit in December

According to the State Bank of Pakistan in its Dec 14 monetary policy, the current account deficit for the ongoing fiscal year is 4pc of GDP higher than the earlier forecast of 2-3pc of GDP.

Trade deficit doubles in July-Dec as imports soar:-

According to the government’s provisional data, Pakistan’s trade deficit doubled to $24.79 billion during the first half of the current fiscal year. From July to December data showed that imports jumped to $39.91bn from $24.47bn a year ago. During July-December exports also grew 25pc to $15.13bn compared to the same month a year ago. Furthermore, exports increased 17pc year-on-year to $2.76bn in December but dropped 5pc month-on-month from $2.9bn in November. The growth in imports has started to decrease. On Sunday, Abdul Razak Dawood tweeted, referring to a month-on-month drop of around $1bn in imports during December. Farrukh Habib the Minister of State for Information and Broadcasting said that the “record growth” of 25pc in exports during July-December had been achieved.

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