KARACHI: The country’s current account deficit (CAD) contracted by 27 per cent to $11.586 billion during the first 10 months of the current fiscal year compared to $15.864bn during the same period last fiscal year, according to latest data released by the State Bank of Pakistan.
The contraction is mainly due to 5pc decrease in total imports even as exports have dropped by around 2pc despite devaluation of the local currency and incentives announced by the government. In addition to that, $1.4bn increase in workers’ remittances also helped prop up overall foreign exchange reserves.
The government has faced challenges to arrest the widening current account deficit despite bilateral borrowings from Saudi Arabia, UAE and China. However, the funds have proven inadequate to finance the CAD as the country’s reserves have declined to $8.8bn — enough for less than three months of import cover due to external debt servicing according to the State Bank.
The rapid decline in reserves forced the government to approach the International Monetary Fund. The fund, after long negotiations, agreed to a 39-month Extended Fund Facility for about $6bn to restore macroeconomic stability and support sustainable economic growth and ensure additional external financing. However, the agreement comes with strings attached including, some say, commitments to roll over bilateral loans, interest rate hike, further devaluation of the currency, and hikes in utility prices including gas and electricity in the upcoming budget.
The agreement with the IMF is likely to be followed by inflows from other lending agencies including the World Bank and the Asian Development Bank.
The CAD, during the last fiscal year, hit record high of $18.619bn depleting reserves at roughly $1.5bn per month stressing government’s ability to payback liabilities.
However, the government’s efforts to compress imports in the ongoing fiscal year are finally bearing fruit as the total imports dipped to $44.033bn, down 7.87pc against the same period last year.
The government introduced corrective measures such as the imposition of regulatory duties and banning furnace oil imports. Furthermore, after introducing new rules governing imports of used vehicles pushing the import bill has downwards during the period under review.
The challenge for the government lies in reversing the declining trend in exports, which have declined 2pc to $20.099bn despite massive devaluation of 18pc in the rupee’s value during the last 10 months and special incentives for export-oriented sectors including textile.
