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Increasing rate of contraction in CAD

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The latest data released for the month of July depicts an increasing rate of contraction in the current account deficit. The decline is high compared to the corresponding month last year. July this year witnessed a current account deficit of $579million whereas it was $2.13billion in July last year. This is a high and considerable drop, and coming on the back of continuous declines since earlier this year, shows that the economy is indeed bouncing up after the maintainable deficits it was burden with when the government began its rule in office. The State Bank’s latest quarterly report, which covers the period July to March of the previous fiscal year, observes an accelerating contraction of the current account deficit but ascribes much of it to a declining oil prices, lessening in imports of LNG, and dwindling of machinery imports as CPEC projects come to a finishing their construction stage and begin commercial operations. A small portion of the overall contraction in the third quarter of the last fiscal year was partly due to government policies, and even that part was possible mainly because the stabilization policies adopted by the government an accelerating and harsh slowdown in the stage of economic activity. In short, conditional factors and collapsing demand explain the declining current account deficit until March, developments that are scarcely deserving of enjoyment. The State Bank was also prudent to point out that in spite of the contractions, the current account deficit remains high, signifying further contraction will be necessary.
The Current Account Deficit was downed by 72.81 percent to $579 million in July, as compared to $2.13 billion in same period of 2018-19. This was in accordance with the declining direction exhibited throughout 2018-19 when the deficit stood lower by 31 percent to $13.58 billion, from $19.8billion in fiscal year – registering a decline of $6.3billion. This must be a comfort for the government which has been activating to stop the deficit through borrowing from donor agencies, commercial banks and friendly countries. Major contributor to the discernible decline was the governmental measures targeting at reducing the imports. Financial experts are of the opinion that if Pakistan is able to bring down current account deficit to single digits in another fiscal year, then the situation would be controllable for the government.
As reported in the July data, exports climbed 10percent to $2.233billion, as compared to $2.012billion and on the other hand imports climbed to $4.08billion, from $5.497billion in same month last year. Consequently balance of trade in goods declined to $1.847billion, as against a deficit $3.485billion. The balance of trade in services, on the other hand, went down 8.5 percent to $473 million, from last year’s level of $517million.The decline in imports has been the primary driver of the lower Current Account Deficit but the trade bodies have criticized measures to reduce on imports, which, they say, would block economic growth and thus harm exports as well. Export industry also depends on imports for manufacturing its products as they use around 33percent of imported constituents. The large reduction in current account deficit would also assist State Bank accumulate its dollar reserves which have failed to harm double digits in spite of continued inflows from friendly countries and donor agencies. Bankers are of the opinion that the fall in current account deficit help bring some fitness to exchange rate and support for both import dependent and domestically adequate manufacturers. The large reduction in current account deficit would also help State Bank enough its dollar reserves which have failed to hit double digits in spite continued inflows from friendly countries and donor agencies. Bankers say the fall in Current Account Deficit will help bring some stability to exchange rate and support for both import-reliant and domestically sufficient manufacturers. Economist and expert Ashfaque Khan was of the opinion that the new government would need to find a way to finance the space. It may go to the International Monetary Fund to obtain a fresh bailout in late August or in early September. His estimation for the current account deficit for the present fiscal year is $21.2 billion. The external financing requirement is anticipated to be more than $31 billion. The deficit has reached the not maintainable level particularly when the economy is at intense around $1.5 billion a month and foreign exchange reserves fell to cover less than two months of imports. The central bank’s reserves stood at $9 billion as of July 13.The current account deficit was higher than the beginning calculated. Government should take measure to restricts IMF forecasted that Pakistan’s external debt and liabilities could climbed to $144 billion in the next five years from $93 billion in fiscal 2018. Lower growth in workers’ remittances and foreign direct investment and increasing foreign debts are deteriorating the balance of payments position.
Direct Investment has gone down by 50 percent from $3.4 billion in 2017-18 to $1.737 billion in last fiscal 2018-19.The reasons of fall in FDI in 2017-18, the main portion came from China for investment and if it is taken out then there will no phenomenal change in FDI figures in 2018-19 if compared with that of 2017-18. In manufacturing sector the FDI had increased by 33 percent. There were good signs showing the expansion and investment in textile sector by the business community. Pakistan is now fast moving towards the production of value added products to earn more dollars. This time exports of yarn has reduced by 18 percent because the exports of value added product that include garments, knit wears and home textiles have increased. Export of garments and knit wears has increased by 17 percent each on the other hand the home textile has risen by 16 percent. Pakistan had got the $1 billion order for exports to China under which Pakistan was to export sugar, rice and yarn. The Free Trade Agreement with China will get effective and will be operational either by end of ongoing month of September or in the first week of October.