Pakistan narrowed its trade loss to $664 million in July 2019, a 71% drop from the trade loss in July 2018.
Its current account deficit has reduced to $579 million in the same time period. The current account deficit is made up of trade loss and official transfers, such as foreign aid. However, these transfers are a very small chunk of the current account deficit.
A trade loss means we import more than we export. Pakistan has recently implemented measures to make imports more expensive, so that people start consuming locally-produced products. When people use products made in Pakistan it helps local industries and reduces our imports.
The reason we want to reduce our imports is because we pay for them in dollars. That wouldn’t be an issue if we had enough dollars but because we don’t export enough, we don’t have enough dollars to pay for expensive imports. This means there will be pressure on our currency and it will remain
Reducing the current account deficit has been the PTI government’s biggest challenge since it came into power in August 2018. This is an issue because a higher current account deficit means we will be paying for imports with dollars we don’t have, therefore reducing our dollar reserves. When our dollar reserves go down, our currency does too and it becomes more expensive to import essential items (like oil) and pay back foreign loans.
The lower trade loss means the government’s policy of encouraging fewer imports and increasing exports is working. In fact, our imports have reduced from $61 billion to $55 billion, which means we saved $6 billion this year.
The smaller trade loss was 37% less than last month (June) and was driven by fewer imports, higher exports and higher remittances. This information was released by the State Bank of Pakistan on Tuesday.
Compared to June, exports and remittances are both up 24%. In a research report, AKD Securities has called the current account deficit narrowing a “giant leap forward into FY 2020”. However, it said that even though exports had risen, it remained skeptical about the sustainability of the export-led improvement.
The yearly comparison showed a 26% decrease in imports and 11% higher exports. But sustainability would come if Pakistan increases its exports further and its current account deficit is driven primarily by higher exports.
Pakistan’s new import policies are the result of a programme it signed with the IMF. As part of the three-year deal, the IMF will give us $6 billion but we need to make some serious changes. One of the biggest changes was to stop controlling our exchange rate. Another was to raise taxes on things like electricity and gas.
After a tumultuous year, the dollar finally began to settle in July after the IMF released its first tranche of $1 billion. In his Independence Day address, State Bank Governor Dr Reza Baqir also said Pakistan’s economy is heading in the right direction.