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CAD shrinks 78pc in 2019-20

By Shahid Iqbal 2020-07-22
KARACHI: The country`s current account deficit in fiscal year 2019-20 fell by 78 per cent mainly on account of significant decline in imports, record high remittances and foreign direct investment during the period under review, latest data issued by the State Bank of Pakistan (SBP) showed on Tuesday.

The current account deficit narrowed to $2.966 billion in FY20, down 78.6pc compared to $13.434bn in the previous fiscal year. Meanwhile, in FY18, the current account deficit was $20bn.

This massive decline also helped government improve its foreign exchange reserves through a sharp reduction in the import bill.

The government had intervened through increasing duties and taxes to cut down the import bill in order to reduce the trade dencit.

According to SBP data, the current account deficit in FY20 fell to 1.1pc of GDP compared to 4.8pc in FY19.

Details showed that exports in the fiscal year under review fell by 7.2pc to $22.505bn. Exporters claim the fall was due to cancellation of exports orders since March when Covid-19 hit international markets and exports came to a halt.

The SBP data further showed that the imports fell by $9.45bn or 18.2pc to $42.419bn. The imports in FY19 were $51.869bn.

The fall in imports helped the government narrow the trade deficit -major driver behind the large current account deficit booked in FY18 and FY19.

The deficit in balance on trade of goods during FY20 was $19.914bn compared to $27.612bn (deficit) in the previous fiscal year. Similarly, the deficit in balance of trade in services fell to $2.835bn from $4.97bn in the corresponding year.

The overalldencitin balance on trade of goods and services fell to $22.749bn compared to $32.582bn in FY19; a decline of $9.833bn.

The numbers showed that the government succeeded in bringing down both the trade and current account deficits.

However, it relied on import compression instead of increasing exports which fell compared to the preceding year.

The government and the SBP have extended a range of incentives to the exports sector in the form of cheaper money and facilitating exporters to pay back their dues. Reports in media suggest that the international markets are now gradually reopening which may help exporters to resume exports from Pakistan in the next few months.

Moreover, the record $23bn remittances sent by overseas Pakistanis in FY20 also helped reduce the current account deficit on a large scale. The 78pc deficit decline would aid the SBP to maintain its foreign exchange reserves in FY21 which touched a three-year high last week.

The pressure on forex reserves also eased after the G-20 deferred Pakistan`s debt repayments due in this calendar year. However, about 30pc increase in imports in June FY20 indicates that the imports are likely to increase despite low petroleum prices.

However, exporters could offset that increase with the help of incentives to reduce the trade gap.