In Pakistan, during the last three decades, the current account is showing a continuous deficit. In the 1980s the average current account deficit was 3.9 percent of GDP, in the 1990’s it increased to 4.5 % of GDP and in the decade of the 2000’s, the average current deficit was 3.9 % of GDP.
Data released by the State Bank of Pakistan showed that the current account witnessed a surplus for the fourth consecutive month in October, rising to $382 million or 1.6 % of the gross domestic product (GDP). Compared to the same month last year, the surplus witnessed an increase of 423pc (Physical Capital) from $73m, while on a month-on-month basis it was up 547pc versus the $59m recorded in September.
The surplus came on the back of a sustained increase in remittances and a smaller trade deficit. Since the start of this fiscal year in July, the cumulative current account surplus has reached $1.2 billion, reversing the $1.4bn deficit recorded in the same period last year. The current account recorded a fourth consecutive monthly surplus in October 2020. Remittances also remained healthy at $2.2bn.
The country’s current account has been helped by a significant increase in remittances during the current fiscal year. Pakistan’s economy continues to improve. The trade deficit continues to shrink and industrial production is showing strong growth. The data released in November by State Bank of Pakistan said that the total foreign exchange reserves crossed the $20bn mark.
The SBP reserves have increased to $12.93bn as of Nov 2020, which is the highest level since February 2018. Total liquid foreign reserves held by the country rose to $20.08bn. Reserves increased due to inflows from lenders like International Monetary Fund, World Bank, Asian Development Bank; a low trade deficit; high remittances coupled with fewer outflows in the form of education and travel expenses due to the pandemic.
The rupee has also started recovering some of the lost value. The government has already missed the annual export target in its first two years. For the current fiscal year, it has set the export target at $27.7 billion, which will require only 6.2% growth. But imports in the first five months were equal to about 46% of the annual target.
On an annual basis, the trade deficit in November 2020 compared to the same month a year ago widened 7.9% from $1.9 billion to $2.1 billion due to an equal increase in exports and imports in terms of percentage. Pakistan has been running consistent trade deficit since 2003 mainly due to high imports of energy.
China has emerged as Pakistan’s largest trading partner replacing the United States. In recent years, the biggest trade deficits were recorded with China, India, United Arab Emirates, Saudi Arabia Kuwait and Malaysia. Pakistan records trade surpluses with the United States, Afghanistan, Germany and United Kingdom.
Central bank data showed current account surplus increased to $447 million in November 2020, mainly owing to rising exports and remittances, against a deficit of $326 million. In October 2020 the surplus was $414. The current account deficit to GDP ratio ranged from 0.83 to 5.8 percent for the fiscal years 2004-05 to 2008-09, however, it stood at 2.13 percent during 2009-10.
However, the current account became surplus in 2010-11 and onward it again turned into deficit. The current account surplus was equivalent to 1.4% of gross domestic product in July-November FY2021. According to the state Bank of Pakistan, in contrast to the previous 5 years, the current account has been in surplus throughout FY2021 due to an improved trade balance and a sustained increase in remittances.
In Nov 2020, both exports and imports picked up, reflecting recovery in external demand and domestic economic activity. The country can sustain a higher level of imports, as strong remittances and pickup in exports are supporting the economy.
Larger than expected remittances from overseas Pakistani workers have helped the country maintain the current surplus, stabilize currency, increase foreign exchange reserves and meet any foreign debt repayments. Remittance flows to Pakistan jumped 26% to 11.77 billion in July-November FY2021.
The current account surplus is likely to be sustainable in the coming months if the exports improve further as a result of recovery in the global economic growth and rebound in the external demand. For this, the key factor could be the distribution and the availability of vaccines in the advanced economies of Europe and the United States and at a domestic level as well.
However, the world has entered a second wave of the coronavirus pandemic with a rising number of cases seen in Europe and the USA and fresh lockdowns imposed in many countries present downside risks to Pakistan’s exports growth.
