Pakistan’s CAD declines by 68% in FY23’s first eight months

Despite decline in CAD, Pakistan struggles to meet deficit due to low foreign exchange reserves

Islamabad: During the first eight months of FY23, Pakistan’s current account deficit (CAD) decreased by 68% to $3.8 billion from $12 billion in the same period last year.

February marked a significant improvement, with the CAD falling to just $74 million, the lowest monthly deficit since February 2021, representing an 86% decline on a YoY basis.

The reduction in CAD was due to lower imports, as there were no significant increases in exports or inflows. However, the government still struggles to meet the decreasing CAD due to low foreign exchange reserves.

Tahir Abbas, Head of Research at Arif Habib Limited, stated that the primary reason for the decline in the deficit on a YoY basis was a 24% reduction in total imports. Meanwhile, total exports and remittances fell by 19% and 9% YoY, respectively.

The declining trend in the CAD during FY23 could result in a much lower deficit than last year’s $17.4 billion. However, experts predict that the CAD could still be around $6 billion in FY23, which is problematic for Pakistan as the International Monetary Fund (IMF) has urged the government to arrange the necessary funds to meet the CAD by the end of FY23.

Although China provided Pakistan with two tranches of $700 million and $500 million to improve foreign exchange reserves, political uncertainties have made friendly countries hesitant to provide loans, fearing a potential default.

The government has increased the interest rate to 20% to meet the IMF’s conditions, which has adversely impacted the country’s trade and industry, resulting in higher inflation of 30%. Furthermore, to bring the fiscal deficit under control, the government has reduced the development budget, slowing economic growth and creating joblessness.

The balance of payments remains under threat, as imports have remained double the value of exports during the July-Feb period. Imports of goods during the first eight months of FY23 stood at $37.88 billion, while exports during the same period were $18.639 billion.

The import of services during this period was $5.118 billion, against exports of services at $4.778 billion. Despite a significant reduction in the CAD, the government still struggles to meet the deficit due to the large trade deficit. Imports of goods during the first eight months of FY23 fell by almost $10 billion, and exports by around $2 billion.

However, the poor export performance and high import costs prevent the country from finding balance on its external front. The balance of trade in goods and services during the first eight months of FY23 was in deficit with $19 billion, compared to $29.8 billion last year.

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