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Pakistan halves its dollars loss, but worse ‘yet to come’

Trade loss expands as exports plunge 24%

Reporting | - Posted: May 30, 2020 | Last Updated: 5 months ago
SAMAA |
Posted: May 30, 2020 | Last Updated: 5 months ago
Pakistan halves its dollars loss, but worse ‘yet to come’

A youngster sits on overloaded rickshaw on Canal Road In Faisalabad May 29. Photo: Online

Pakistan’s current account, the dollar account which records the country’s transactions with the rest of the world, saw its deficit (loss) shrink 50% in April compared to the corresponding month of 2019. This was the latest according to State Bank of Pakistan data, but Karachi’s Intermarket Securities warn the worse has yet to come.

“We think that the April current account deficit does not fully capture the impact of the Covid-19 pandemic, and the outturn in May could be worse,” the brokerage house said in a report on Friday.

Explaining why, it said the Pakistan Bureau of Statistics exports data for April shows a 24% decline, mostly in textiles, which are largely Europe- and US-bound. “The PBS data depicts a better picture of the extent of damage to Pakistan’s exports,” it said, noting that the trade deficit (loss) expanded to $1.8 billion.

Pakistan has a net trade deficit because it spends more dollars on imports than what it earns from exports. A high deficit is not sustainable because it 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 creates a balance-of-payment crisis and devalues our currency. This is exactly what happened in 2018, forcing the PTI government to seek a bailout from the IMF to avoid a default on its foreign payment obligations.

To reduce the current account deficit, the PTI government clamped down on imports and applied brakes on economic growth, using measures to discourage buying such as higher duties on a range of items. It saved $7.5 billion by reducing the current account deficit by 74% between July 2019 and April 2020.

The data for the latest month shows that the current account deficit went down by half in April compared to the same month of the previous year. However, analysts at Intermarket Securities say the current account deficit could be higher because of a high trade loss. This is because the dollar outflows (foreign loan repayments, outflow of hot money etc.) were more than matched by the debt inflows, the $1.4 billion emergency cash assistance package from the IMF and other multilateral agencies.

The analysts at IMS warn that a greater fallout in the current account deficit is expected in May, noting that April was the first full month of a lock down in the country. Besides falling exports, the brokerage house said remittances, which fell 5%, are also at an unprecedented risk.

In March and April, they were steady because of Ramadan and the Eid festival falling in May. However, Saudi Arabia and the UAE that collectively account for half of the total remittances have been severely impacted by a sharp decline in oil prices and tourism. “The Dubai Expo 2020 is postponed and Hajj proceedings remain uncertain,” it said. Meanwhile, Europe and the US have been the epicentre of the outbreak since March.

Pakistan’s dollar reserves rose 14% to $12.3 billion in April compared to the previous month, which is enough to pay for four months of imports. This also explains the relative stability in the exchange rate since March, it said. “In the coming months, assuming a potentially larger current account deficit, net inflows in the financial account could emanate from a suspension of repayments to G-20 countries and multilateral assistance (ADB and World Bank in particular).”

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