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Pakistan saves $7.5b in nine months as trade loss shrinks

Reducing the deficit has been the PTI's biggest challenge

SAMAA | - Posted: Apr 24, 2020 | Last Updated: 9 months ago
SAMAA |
Posted: Apr 24, 2020 | Last Updated: 9 months ago
Pakistan saves $7.5b in nine months as trade loss shrinks

A vendor with his bulk supplies of locally produced chips packets on Jahangir Road during the lockdown Apri 23 in Karachi. Photo: ONLINE

Pakistan saved $7.5 billion since July 2019 after its current account, which records the country’s transactions with the rest of the world, shrank by more than two-thirds during the period, according to data the State Bank of Pakistan released Thursday evening. 

Pakistan’s trade loss shrank 84% to $36 million in March compared to a loss of $227 million it booked in the preceding month, the SBP data shows. Pakistan has a net trade deficit because it spends more dollars on imports than what it earns from exports. The latest data shows a drop of $238 million in its monthly imports that helped reduce the negative trade balance even further.

Trade balance is part of the current account, an important measure to assess an economy’s health used by both the government and policy makers. Besides the trade balance, the current account records things such as official transfers and remittances. The SBP data shows the monthly current account deficit has come down to $6 million compared to $198 million of the previous month.

Reducing the current account deficit has been the PTI government’s biggest challenge since it came to power in August 2018. We cannot sustain a higher current account deficit as for every dollar earned, we spend two, which eats into our dollar reserves and we are left with fewer dollars to import essential items (like oil) and pay back foreign loans. This eventually devalues our currency.

To reduce the current account deficit, the PTI government has clamped down on imports, using measures such as higher duties on a range of items. As a result, the government has been able to cut its current account deficit 74% since July 2019. This translates to a savings of $7.5 billion in nine months ending March.

The country even reported a surplus (a positive current account balance) of $99 million in October 2019, before slipping back in to the negative zone, but the current account deficit narrowing is seen by analysts as a giant leap forward into fiscal year 2020. However, experts still remain skeptical about the sustainability of the export-led improvement because the reduction in the current account came on the back of import restrictions, which may not be a good policy in the long-term. To reduce the deficit, Pakistan has to grow its exports, and not choke its imports, they say.

Pakistan’s new import policies are the result of a $6 billion programme it signed with the IMF in July 2019. As part of the three-year deal, we need to make some serious changes, the biggest of which was to stop controlling our exchange rate. Because of this significant drop in the current account, we were able to double our dollar reserves in one year.

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