Pakistan’s current account (C/A) clocked in a deficit of $662 million in December 2020, compared to a surplus of $513 million in November 2020, the worst since October 2019.
The current account has been in surplus since the last five months, consecutively. The current account recorded a variance of $1.175 billion, which was largely fueled by an increase of $940 million in imports of goods. The exports of goods increased by $13 million and home remittances grew by $98 million.
Taking cue from earlier released numbers by Pakistan Bureau of Statistics (PBS), the increase in the imports of goods can largely be attributed to higher imports of (1) Wheat, (2) Raw Cotton, (3) CKD/CBU units of automobiles.
It is important to note that discrepancy exists between State Ban of Pakistan (SBP) and PBS figures, as SBP relies on receipts and payments of foreign exchange to compile its data while PBS monitors physical movement of goods, according to an analyst at Topline Securities.
The analyst expects the impact of the recent increase in international oil prices to be visible in coming months’ imports.
The C/A surplus in the first half of 2020-21 clocked in at $1.131 billion compared to a deficit of $2.032 billion, where improvement in balance is largely due to increase in home remittances by $2.832 billion (i.e. +25% YoY). The exports of goods declined by $590 million (-5% YoY), while imports of goods increased by 1.071 billion (+5% YoY).
The C/A surplus in 2QFY21 came in at $266 million (vs. $865 million in first quarter 2020-21), where encouragingly exports of goods increased by 20% QoQ compared to imports of goods which grew by 18% QoQ. Home remittances declined by 1% QoQ.
In spite of a C/A deficit in December 2020, the overall balance recorded a surplus of $678 million potentially because of borrowings. The overall balance in the first half 2020-21 recorded a surplus of 1.279 billion largely owing to C/A surplus and foreign direct investments (FDI) of $901 million during the period.
Pakistan’s external account estimates are where we now expect home remittances to clock in at $27.5 billion in 2020-21. However, trade deficit estimates are to be $25.2 billion.
The imports of goods are likely to increase higher than expected as economic activity has picked up (e.g. import of Auto CKD/CBUs, coal for cement etc.), while pressure on account of import of machinery through TERF is also anticipated.
The analyst report said that a PKR/USD estimate of Rs 166 by June 2021 and 172 in December 2021 is intact for now. There is no change in the policy rate in the January 2021 MPS, however the analyst predicts an increase in the policy rate by 100bps in May/July 2021.