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Pakistan current account turns to deficit after five months

Country still in surplus of $1.13b in FY2021

SAMAA | - Posted: Jan 21, 2021 | Last Updated: 1 month ago
Posted: Jan 21, 2021 | Last Updated: 1 month ago
Pakistan current account turns to deficit after five months

Photo: AFP

Pakistan’s current account showed a deficit of $662 million in December after remaining in surplus for five consecutive months, according to the State Bank of Pakistan data.

However, the current account was still in surplus of $1.13 billion in the first half of FY2021 from July to December. It was in a deficit of $2 billion during the first six months of FY2020. A fiscal year begins with July in Pakistan.

In contrast to the past five years, the current account had been in surplus in the ongoing fiscal year except December. The SBP says it is due to an improved trade balance and a sustained increase in remittances. In November, both exports and imports picked up, reflecting recovery in external demand and domestic economic activity. However, imports had been higher and overshadowed exports and remittances in December.  

The current account is an important yardstick to measure the health of a country’s economy. It records dollar transactions of a country with the rest of the world. In Pakistan’s case, it is usually in deficit or loss as the country spends more dollars than it earns.

But during the first six months of FY2021, Pakistan reported a surplus. One of the reasons for this surplus was higher remittances and reduced imports due to the pandemic and government efforts.

Reducing the current account deficit has been the greatest problem of the PTI government since it came to power in August 2018. The usual trend of spending two dollars for every dollar earned was not sustainable as it led to a high current account deficit.

The country is then left with fewer dollars to service foreign debt and pay for imports, such as oil, which have to be repaid in dollars. Failing to do so can lead to a default.

The PTI government faced this problem shortly after coming to power. The country’s dollar reserves depleted within the first six months of the PTI government. They were hardly enough to pay for two months of imports. Depleting dollar reserves are a cause for alarm as they are linked to gradual devaluation of rupee. To avoid a default and shore up the dollar reserves, PM Imran Khan’s government signed a $6 billion bailout with the International Monetary Fund to deal with this challenge.

The IMF programme opened more doors for Pakistan as the World Bank, Asian Development Bank and Asian Infrastructure Investment Bank also pledged support to the country.

According to the IMF, the bailout programme was supposed to unlock an additional funding of $36 billion over its life.

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