Current Account Deficit Shrinks; Remains vulnerable

Current Account Deficit Shrinks Further

For quarter ended in September, Pakistan’s external accounts saw the much needed stabilization as Current Account deficit shrank both on quarter-on-quarter (down 48%) and year-on-year (down 89%) basis. The reduction is driven by a 28% fall in imports and steady rise in remittances, which stood at USD2.3billion for the first quarter (up 24% year-on-year).

Non-essential imports fell…

Both volumes and payments for non-food non oil imports have reduced over last year as commodity prices have tapered down and domestic growth remains slow. Decrease of USD420million and USD100million (quarter-on-quarter basis) was witnessed in imports of machinery and metal products respectively corroborating that domestic production has slowed down. We believe that if the prevailing trend of reduction in non-essential imports continues, a low current account deficit for the remainder of the year may be sustainable. …But oil imports will be key Petroleum products constitute bulk of our imports, constituting 30% of total import bill. Crude oil prices are once again on the rise (mainly due to the weakness in the dollar) and have almost doubled from the year’s low of USD40.22/bbl. The experience from last year tells us that any persistent rise in oil prices could lead to structural instabilities in our balance of payments.

As per our analysis, if oil prices stay around USD80/bbl, Pakistan’s current account will remain stable with little or no depletion in the country’s foreign exchange reserves. If, however, oil prices rise and peak above USD100/bbl during the remainder of the year, balance of payments pressures will likely return. The table below highlights the sensitivity of oil price for our external Accounts