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Current account deficit soars to $773mn in July

Pakistan's current account deficit widens to $773 million in July 2021, compared to a surplus of $583 million posted one year ago. While the likely determinants of this fall are an increase in imports and increasing global commodity prices, the State Bank believes it is still in line with its projections.

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As the economy expands and the imports to the country rise, Pakistan’s current account posts an uptick in deficit by $773 million in the first month of the current fiscal year 2021-22 (FY22).

According to the data released by the State Bank of Pakistan (SBP), the current account deficit (CAD) for the month of July 2021 was in deficit compared to the surplus of $583 million noted in July 2020. However, month-on-month basis the current account deficit declined 52 percent in July 2021 as against June 2021, in which the current account deficit was $1.619 billion, the highest in the FY21.

It is worth mentioning that the country went from surplus to deficit since the beginning of the calendar year 2021, but it has widened greatly since May 2021. In January the CAD was $229m, $50m in February, $47m in March, and $188m in April, but in May it widened to $650m and surged to $1.62bn in June, and by the end of FY21 Pakistan had reached the CAD of $1.83bn.

The major determinant of this Year-on-Year (YoY) jump from a surplus in July 2020 to a deficit in July 2021 is the increase in imports. The first month of FY22 recorded total imports, in goods and services, of $6.12 billion vs. $4.33 billion in the same month of FY21, showing an increase of 41.3pc YoY.

The country’s imports are increasing due to pick-up in domestic activity and higher global commodity prices and expensive vaccine imports to deal with the ongoing pandemic.

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State Bank of Pakistan took to Twitter to say, “This deficit is in line with SBP’s expectations of a current account deficit of 2-3 pct of GDP as economic activity continued to progress.”

The central bank added, “Despite the recent increase in CAD, SBP’s foreign reserves position continued to strengthen on monthly basis. This is in contrast to past trends and is supported by country’s market-based exchange rate system.”

The State Bank earlier on Monday also tweeted saying that for the previous fiscal year 2020-21, the CAD fell to only 0.6pc of GDP, which is the lowest in a decade.

Sector-wise

Looking at the goods sector separately, the exports in Jul’21 stood at $2.257 billion compared to $1.885 billion in Jul’20, while the imports for the sector stood at $5.396 billion in the first month of FY22 compared to $3.557 billion in the same month of FY21. This resulted in an increase in trade deficit by 87.7pc YoY to $3.139 billion in July FY22 up from $1.672 billion in July FY21.

Now, seeing the service sector, which has done better YoY in July 2021 compared to July 2020, decreasing the trade deficit by 26.4pc to $232 million in Jul’21 down from $313 in Jul’20. This was attributed both to an increase in exports and a decrease in imports in the services sector. Pakistan saw $483 million in exports and $715 million imports in the first month of the current fiscal year.

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Comparing the FY21 with FY20, the external account performed well during the last fiscal year supported by a market-based flexible exchange rate system, record remittances inflows, and growth in exports. The overall current account posted a deficit of $1.8 billion during July-June FY21 as against a $4.449 billion deficit in FY20, recording a decline of 58pc or $2.59 billion.