Pakistan External Account & Exchange Rate

External Account & Exchange Rate
Pakistan’s external sector has witnessed improvement since joining IMF standby agreement in late 2008, and since then PKR exchange rate has depicted relative stability. During Jul09-Feb’10, USD/PKR has undergone an average monthly depreciation of 0.56%. Deregulation of foreign exchange inter-bank market and uncertainty over maturity of foreign support has increased volatility in recent months.

External account
Stabilization in external account continued as Jul’09-Jan’10 current account deficit shrank to USD2.5billion, down 69% year-on-year (YoY). Reduction in deficit was led by sharp decline in trade deficit, which stood at USD6.6billion (down 27% YoY) and healthy inflow of remittances (up 22% YoY). Based on current trend, the current account deficit could potentially outperform the IMF projected target of USD7.5 billion.

Remittances
Remittance inflows for Jan’10 stood at USD668million (down 4% MoM), aggregating Jul’09-Jan’10 inflow to USD5.2billion (up 22% YoY). Despite paring strong compared to last year, a persistent down-trend is visible in remittances since their peak of USD804million in Sep’09. Consistent decrease in remittances could deteriorate economy’s deficit financing capability, and result in increased pressure on USD/PKR.

Oil Prices
Petroleum products compose bulk of our imports, constituting 30% of total import bill. Crude oil prices are once again on the rise (mainly due to recovery in global economies) and have almost doubled from last year’s low of USD40.22/bbl.

Exchange Rate Outlook
Based on some semblance of stabilization in Pakistan’s external accounts, we expect the exchange rate to remain less volatile in coming months. However, we are of the view that the Rupee will continue to remain weak in line with IMF forecasts (refer to Table 2).



--Asim Jahangir