Current account slips back into deficit

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KARACHI: Weakening foreign inflows and hefty debt repayments have pushed Pakistan’s current account into the red again. Latest figures from the State Bank of Pakistan show the country has run up a deficit of $365 million in the first five months of the current fiscal year. This deficit comes on the heels of a modest surplus: improvements in the services account and strong remittances over the first four months of the current fiscal had thrown up a $258 million surplus. However, the July to November data for this year still compares favourably to the $2.341 billion deficit incurred over the same period in the last fiscal. Significantly, the current account deficit during November 2012 alone was $638 million.

Analysts say the reversal in the current account balance not only indicates a certain degree of stress on the external sector but is also reflective of macroeconomic imbalances in the national economy.

The latest data reveal that the balance of payments has started deteriorating due to massive outflow of foreign exchange reserves on account of foreign debt obligations as well as weaker capital and financial inflows.

(On November 21, Pakistan paid the seventh installment worth $394.3 million to the IMF.) This has resulted in a reserves drawdown of at least $2.2 billion, according to the SBP. (However, independent estimates put this number at $3 billion.) Consequently, says the SBP, the country’s official foreign exchange reserves fell to $8.6 billion as on December 14, 2012, from $10.8 billion at end-June 2012.

Foreign direct investment inflows over the period have slowed down to $305.6 million while the country saw a net outflow of $304 million from the capital and financial accounts between July and October.

This situation has also put pressure on the local currency, which is said to have depreciated by four percent since the beginning of this fiscal year.

While strong growth in remittances proved a buffer, the debt payouts, stagnant exports and low prospects of external financial inflows suggest a difficult and depressing outlook for the economy in the coming months.

Further, the economy is also prone to adverse shocks in the shape of fluctuating international oil prices. Significantly, experts do not foresee any improvements in FY13 unless the budgeted foreign financial inflows materialize, particularly since Pakistan has to make a large repayment – some 258.4 million SDRs – to the IMF in February 2013.

However, some experts think Pakistan has bigger problems to worry about. Eminent economist Dr Ashfaque H. Khan, for example, insists that the reports of Finance Minister Hafeez Sheikh’s pleas to the IMF for a moratorium spell more trouble.

“Requests for moratoriums give the international community the impression that the country is likely to default on its debt obligations,” says Khan. “Statements of this sort scare away international investors, thereby further impeding the country’s chances of acquiring foreign direct investment.”


Courtesy: The News

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