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Pakistan’s external sector doing good, but the way ahead is thorny

Pakistan's Current Account has fared pretty well on the back of high capital inflows from remittances and the textile sector, but the recent downward trajectory shows that government needs to work on policy reforms to diversify the export portfolio and maintain the promised "sustainable growth".

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The month of June witnessed a downward turn for the country as according to the State Bank of Pakistan (SBP) data, the current account deficit (CAD) for June 2021 has increased from $650 million in May 2021 to $1,644 million in June 2021.

Although the exports for June 2021, the last month of the fiscal year 2021 (FY21), increased 63.32 percent month on month (MoM), the imports also went up 20.39 percent offsetting the positive trend in exports and increasing the trade deficit by 0.61 percent (in dollar terms).

According to the data released by the Pakistan Bureau of Statistics, the year-on-year (YoY) increase in the trade deficit for June 2021, compared to June 2020, has been 63.96 percent, which has been majorly attributed to the opening of the economy.

However, it is worth mentioning that despite the nosedive in the last quarter, the current account in FY21 remained relatively good as it took a full year for CAD to go into a deficit of $1.85 billion (0.6% of GDP) versus $4.45 billion (1.7% of GDP) in the previous year.

Not only the preceding year, but the CAD also saw a significant decrease compared to FY18 and FY19, with $19.9 billion and $13.4 billion, respectively.

The exports for the 12MFY21 stood at $25.3 billion compared to $21.4 billion in the same period of the preceding year, showing an increase of 18.28 percent.

Some record positive statistics were seen during the FY21 as the country saw the highest ever merchandise exports and high remittances, both adding to high capital inflow in the country.

The year recorded the strongest-ever remittances inflows of $29.3 billion and exports worth $25.6 billion in Pakistan’s history while imports stood at a 3-year high of $53.8 billion.

Textile exports reached their highest level in history at $15.4 billion in 12MFY21 with the value-added segment registering an uptick of 28.5 percent YoY from $12.5 billion in 12MFY20 as the country benefitted from trade war between China and US/EU, and business disruptions in competitive economies. Knitwear saw the biggest jump with 36.6 percent YoY, while the raw cotton exports saw a 95.27 percent decline.

Similarly, the services sector saw an increase in exports YoY, reaching $5.9 billion, up from $5.4 billion FY20, decreasing the deficit in the sector from $3.3 billion in FY20 to $1.9 in FY21 supported by a decrease in imports.

Read More: Urea exports: Massive opportunity for the economy of Pakistan

Forecast 

Experts at AKD Securities forecast that the CAD for the current FY22 would reach $8.3 billion or 2.6 percent of the GDP, keeping in mind the government’s growth agenda.

However, according to the experts, the “swing factor” is remittances, which have recorded a low during June 2021. AKD analysts believed that the funding side should balance enlarged CAD, which should withhold excessive pressure on dollar-rupee parity.

The recent Fiscal Year 2021 has been relatively positive for Pakistan in terms of the current account, and the government in its recent statements has reiterated that it would like the trend to be sustainable under the proposed “sustainable growth” framework that Finance Minister Shaukat Tareen has presented in the recent budget.

Also, the CA balance’s dependence on remittances had rightly been deemed dangerous by the finance minister in his speech while launching Economic Survey for the FY21, the government launched initiatives to counter this problem.

Setting up a new Amazon Facilitation Centre in Multan guarantees a greater market access to the SMEs in Pakistan, in the end helping achieve the government’s growth objective. This is because the already growing merchandise export will get a boost from these initiatives.

Similarly, the government has set up a National Export Development Board (NEDB) and an Export Facilitation Scheme (yet to be approved by the Parliament) to incentivize exports.

Under the scheme, the government is going to follow up on the vision of aiding the development of SMEs in the country by providing them with loans and incentivizing them to develop technologically and increase their target market.

Read More: Exports to Australia surge by 33 pc over the recent fiscal year 2020-21

The NEDB would be a monitoring body comprising stakeholders like relevant ministers and representatives of the business community from the Federation of Pakistan Chambers of Commerce and Industry and the Pakistan Business Council.

Commenting on the mentioned increase in CAD, Chairman AKD securities Aqeel Karim Dhedhi said Pakistan’s economy is in the expansion phase. He said that the import in machinery has gone up in the second half of the FY21, showing a 15 percent increase.

Speaking at a TV program on 23rd July he claimed that the State Bank has lent Rs500 billion for the import of machinery, and this is good news in the long term as it is capital expenditure and will become a source of increased exports in the future.

Mr. Dhedhi said that Pakistan’s exports for June 2021 stood at $2.8 billion, and it would become $34 billion for the fiscal year. On the other hand, he said that if the remittances come up to $30 billion, the $64 billion in capital inflow from these two sources is very good for the country.

He claimed that if the expansion happens as seen, Pakistan’s exports can hit $37 to $40 billion in the fiscal year 2022, arguing that the overall economy is heading towards major expansion as demand is expected to rise.

Commenting on the recent policies such as Housing, Auto and Textile policies would lead to increased demand in the economy, so much so that the industries will have to expand.

He quoted the expansions in the cement sector in the FY21, saying that all different industries will have to follow suit.

Similarly, the development of the ICT sector under the umbrella of Special Technology Zones is important as the regulation of the sector has seen positive results. In FY21, the Telecommunications, Computer, and Information Services exports reached $2.1 billion compared to $1.4 billion in FY20 and $1.2 billion in FY19.

If the exports in the IT sector reached $5 billion by 2023 as forecasted by the Minister for IT & Telecommunication Syed Amin ul Haque, it would be a positive development for the CA balance of the country.

Read More: Pakistan to boost rice exports to record level after gaining access to Russia

All in all, the policy interventions seem to be working for Pakistan, and export growth continues as forecasted by experts and the government, it can be a good long-term trajectory for the country.

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