Dollars earned exceed dollars spent
Pakistan’s current account turned to a surplus of $13 million in May, the State Bank of Pakistan said Wednesday. It is the second time in eight months that the country earned more dollars than it spent. The last time it happened was in October 2019, when the country showed a surplus of $99 million.
Pakistan has long struggled to keep its dollar account in check and it was one of the biggest challenges the PTI faced when it came into power.
“Prior to these surpluses, the last time Pakistan recorded surpluses were in 2016 during the PML-N tenure when oil prices plunged below $30 a barrel,” JS Research’s analyst Ahmed Lakhani said.
“The country recorded surpluses for three consecutive months in February, March and April of 2016.”
The current account shows the country’s dollar transactions – with dollars coming in and out of the country’s account and whether it received or lost more during a month or a period under study.
The current account or dollar account of Pakistan mostly remains in a loss because we spend more dollars than we earn, which is why it is commonly referred to as current account deficit (CAD) instead of current account balance.
Prior to the surplus in May, the country incurred a deficit or loss of $530 million in April and $1 billion in May of 2019.
The main reason behind the surplus in May has been a reduction in our trade loss. Trade loss or deficit shrank by $296 million while remittances, also a part of current account, increased by $80 million compared to April.
The current account deficit has narrowed to $3.3 billion in the first nine months of fiscal year 2020, 73.6% down from $12.5 billion during the corresponding period of last year.
“The IMF’s program wanted us to reduce our current account deficit to $6 billion from $12.5 billion,” Lakhani said. “At least we have fulfilled IMF’s that condition by reducing CAD to $3.3 billion.”
The notable sharp reduction in current account deficit is touted as one of the major successes of the current government. A high CAD is not sustainable because it leaves the country with fewer dollars in its reserves to pay for essential imports like oil and machinery.
To plug the CAD, the central bank has to use its dollar reserves or buy dollars from commercial banks, which increases the demand for the greenback and puts Pakistani rupee under pressure.
Since August 2018, the Pakistani rupee has depreciated by more than 25%. Though an achievement, the surplus came at the expense of choking our imports. Under the conditions set by the IMF, Pakistan had to clamp imports by raising duties and apply brakes in economic growth.