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Current account turns from surplus to deficit
Deficit comes on back of surge in imports to over $5b in December 2020
Salman SiddiquiJanuary 21, 2021
In line with market expectation, Pakistan’s current account balance - the difference between government’s foreign income and expenditure - recorded a deficit of $662 million in December 2020 after remaining in surplus for a record period of five months (July-November) of current fiscal year 2020-21.
The current account deficit primarily stemmed from a jump in imports to over $5 billion in December 2020 after quite a long hiatus. Growing import payment pressure may turn the rupee weaker against the US dollar and other major currencies like euro and pound sterling.
“Imports of some essential food items as well as growth-enhancing capital goods, oil and industrial raw material rose on the back of domestic economic recovery,” the State Bank of Pakistan (SBP) said on its official Twitter handle on Wednesday.
“The return of deficit was in line with market expectation. It, however, came in higher than market’s estimate,” Pak-Kuwait Investment Company Head of Research Samiullah Tariq said while talking to The Express Tribune.
“In December 2020, the current account registered a deficit of $662 million after remaining in surplus for the past five months. Cumulatively, in the first six months of FY21, the current account remains in surplus at $1.1 billion compared to a deficit of over $2 billion during 6MFY20,” the SBP said.
The deficit for December 2020 was up by 131% compared to $287 million in the same month of previous year.
The deficit was higher than market expectation “due to the doubling of primary income deficit (increase in repatriation of profit by foreign firms operating in Pakistan to their headquarters) in December 2020 compared to the previous month of November.”
“Imports were significantly high. They should go down in coming months after fresh supplies of locally produced sugar arrive in the market and fresh production of wheat is available from the end of February or March,” Tariq said.
Besides, a steady growth in export earnings and strong inflows of workers’ remittances from overseas Pakistanis would help restrict the current account deficit to around $200-300 million a month in the second half (January-June) of FY21, he said. A significant growth in IT exports would also play a part in bringing down the current account deficit, he said.
AHL Research said imports rose 27%, or $1.22 billion, to $5.02 billion in December 2020 compared to the same month of previous year. Imports rose to a two-year high after hitting $6.44 billion in July 2018.
However, exports and remittances were also up 8% and 16% year-on-year respectively during December 2020.
“The outlook for the external sector has improved since the previous set of projections published in SBP’s FY20 Annual Report. The current account deficit is now projected to be in the range of 0.5-1.5% of GDP (earlier 1-2% of GDP),” the central bank said in its recent report titled The State of Pakistan’s Economy.
The revision in the deficit is mainly due to an upward adjustment in workers’ remittances, which are now expected to be in the range of $24-25 billion (earlier $22-23 billion), it said.
However, projections for workers’ remittances are subject to risk from the outlook for oil-exporting Gulf Cooperation Council (GCC) economies, whose fiscal balances might deteriorate further with the escalation in global Covid-19 infections. This may translate into a sizable reduction in their demand for foreign workers, leading to lower remittance inflows in Pakistan, the SBP said.
The outlook of exports and imports largely remains unchanged from the earlier assessment. The greater quantum of high value-added textiles and food commodities - especially rice - are expected to generate above-target growth in exports. That said, the key downside risk to this outlook stems from the resurgence of Covid-19 in major export destinations of Pakistan, which has the potential to suppress demand, the report added.
On the upside, the incentives given in the industrial support package since early November 2020 may help textile sector exports perform better.
“Similarly, imports are projected to surpass their annual target. The increase in food imports and domestic economic activity is mainly expected to drive import growth. That said, the increase in global Covid-19 infections and further decline in crude oil prices could lower import payments,” it said.
Published in The Express Tribune, January 21st, 2021.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.
Deficit comes on back of surge in imports to over $5b in December 2020
Salman SiddiquiJanuary 21, 2021
In line with market expectation, Pakistan’s current account balance - the difference between government’s foreign income and expenditure - recorded a deficit of $662 million in December 2020 after remaining in surplus for a record period of five months (July-November) of current fiscal year 2020-21.
The current account deficit primarily stemmed from a jump in imports to over $5 billion in December 2020 after quite a long hiatus. Growing import payment pressure may turn the rupee weaker against the US dollar and other major currencies like euro and pound sterling.
“Imports of some essential food items as well as growth-enhancing capital goods, oil and industrial raw material rose on the back of domestic economic recovery,” the State Bank of Pakistan (SBP) said on its official Twitter handle on Wednesday.
“The return of deficit was in line with market expectation. It, however, came in higher than market’s estimate,” Pak-Kuwait Investment Company Head of Research Samiullah Tariq said while talking to The Express Tribune.
“In December 2020, the current account registered a deficit of $662 million after remaining in surplus for the past five months. Cumulatively, in the first six months of FY21, the current account remains in surplus at $1.1 billion compared to a deficit of over $2 billion during 6MFY20,” the SBP said.
The deficit for December 2020 was up by 131% compared to $287 million in the same month of previous year.
The deficit was higher than market expectation “due to the doubling of primary income deficit (increase in repatriation of profit by foreign firms operating in Pakistan to their headquarters) in December 2020 compared to the previous month of November.”
“Imports were significantly high. They should go down in coming months after fresh supplies of locally produced sugar arrive in the market and fresh production of wheat is available from the end of February or March,” Tariq said.
Besides, a steady growth in export earnings and strong inflows of workers’ remittances from overseas Pakistanis would help restrict the current account deficit to around $200-300 million a month in the second half (January-June) of FY21, he said. A significant growth in IT exports would also play a part in bringing down the current account deficit, he said.
AHL Research said imports rose 27%, or $1.22 billion, to $5.02 billion in December 2020 compared to the same month of previous year. Imports rose to a two-year high after hitting $6.44 billion in July 2018.
However, exports and remittances were also up 8% and 16% year-on-year respectively during December 2020.
“The outlook for the external sector has improved since the previous set of projections published in SBP’s FY20 Annual Report. The current account deficit is now projected to be in the range of 0.5-1.5% of GDP (earlier 1-2% of GDP),” the central bank said in its recent report titled The State of Pakistan’s Economy.
The revision in the deficit is mainly due to an upward adjustment in workers’ remittances, which are now expected to be in the range of $24-25 billion (earlier $22-23 billion), it said.
However, projections for workers’ remittances are subject to risk from the outlook for oil-exporting Gulf Cooperation Council (GCC) economies, whose fiscal balances might deteriorate further with the escalation in global Covid-19 infections. This may translate into a sizable reduction in their demand for foreign workers, leading to lower remittance inflows in Pakistan, the SBP said.
The outlook of exports and imports largely remains unchanged from the earlier assessment. The greater quantum of high value-added textiles and food commodities - especially rice - are expected to generate above-target growth in exports. That said, the key downside risk to this outlook stems from the resurgence of Covid-19 in major export destinations of Pakistan, which has the potential to suppress demand, the report added.
On the upside, the incentives given in the industrial support package since early November 2020 may help textile sector exports perform better.
“Similarly, imports are projected to surpass their annual target. The increase in food imports and domestic economic activity is mainly expected to drive import growth. That said, the increase in global Covid-19 infections and further decline in crude oil prices could lower import payments,” it said.
Published in The Express Tribune, January 21st, 2021.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.
