KARACHI: After witnessing a period of economic uncertainty during the past few quarters stemming from ballooning current account deficit and concomitantly falling foreign exchange reserves, things finally seem to be improving for Pakistan.
The last two months current account deficit has finally seen a meaningful decline. While trade deficit during the 1QFY19 surged by 8.0% YoY, healthy growth in remittances has resulted in a 3.0% decline in the current account deficit.
“Going forward, we are of the view that pressure on the current account deficit will ease off as the recently enacted policy measures manifest itself, with some more steps expected in the near-term,” says Dr. Amjad Waheed CEO of NBP Funds.
The government redoubled its focus on boosting exports as further incentives have been parcelled out such as exemption from gas and electricity tariff hikes. Recent devaluation of the rupee and slapping of import duties are expected to curtail imports in the coming months. After some initial hesitation, the government has decided to negotiate a financial program with the IMF.
“Besides providing immediate financial inflows, entry into the IMF program would ameliorate the credibility of Pakistan in the eyes of global financial community that paving the way for fetching flows from multilateral agencies such as the World Bank, Asian Development Bank, Islamic Development Bank, and also facilitate access to international capital markets,” Dr. Waheed noted
The recently announced Saudi funding to the tune of US$ 6 billion in the shape of cash deposit and oil on deferred payments for one year will support the dwindling foreign currency reserves. The Government has also requested the United Arab Emirates for a Saudi-like deferred payment facility for oil imports. Apart from the friendly countries in the Middle East, Pakistan is also looking towards its all-weather friend China in tackling the external funding crisis and is also expecting concessions on tariff lines, which will ultimately boost our exports to China.
Though materialization of funding from friendly countries will help in meeting the external financing needs for FY2019; the urgency for structural reforms and measures to further narrow the current account deficit should remain the policy priority given large debt repayment requirement in FY2020. Nonetheless, this inflow from friendly countries should help in negotiations with the IMF on less stringent terms such as currency devaluation in line with the economic fundamentals, extent of further monetary tightening, and quarterly targets on build-up of SBP’s reserves.
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