Current account deficit to widen this FY

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Fitch Solutions expects Pakistan’s current account deficit to widen in fiscal year 2021-22 to 2.2 percent of GDP from 0.6 percent in the previous fiscal year.

“This is due to our expectation for imports to grow faster than exports because of a strong rebound in domestic demand, alongside elevated oil prices,” said Fitch Solutions in a recently issued report. Remittance growth is expected to slow from the fiscal year 2020-21 highs as the one-off impact on remittance growth, from switching to formal banking channels, will fade. “That said, we believe that external vulnerabilities will ease in the near term amid bilateral and multilateral funding support,” it said.

Fitch Solutions forecasts Pakistan to register a larger trade deficit of 11.7 percent of GDP in FY 2021-22, from 9.9 percent in FY 2020-21. “We expect goods import growth to slow slightly to 16.5 percent in the current fiscal year from 23.2 percent in FY 2020-21, due to waning base effects.” Fitch forecasts the economy to expand by 4.2% in FY 2021-22 following an expected GDP growth outturn of 3.9% in FY20/21, given the government’s reluctance to implement lockdowns despite Covid-19 outbreaks.

An improving economic outlook will most likely see consumer spending rebound and increase demand for capital goods, driving up imports value. With petroleum products accounting for approximately 18.0% of total imports value in FY20/21, elevated fuel prices will also further increase Pakistan’s imports bill. “While we expect exports to rise in FY21/22, it will be insufficient to offset the increase in imports,” said Fitch Solutions.

Fitch said that Pakistan’s lacklustre foreign direct investment (FDI) inflows will continue to fall short of financing its current account deficit. Averaging about USD2.3bn in the last four years, net FDI slipped to USD1.8bn in FY20/21, which was only sufficient to cover approximately 10 days’ worth of goods imports. This is due to structural issues which continue to deter investors.

A key issue is the threat of terrorism, which will pose significant threats to foreign business assets and workers. The instability in Afghanistan may exacerbate terrorism risk. Another key issue is the uncertainty surrounding regulations, which creates hesitancy for businesses to invest.

“We believe that external vulnerabilities will ease for Pakistan in the near term. While the country’s gross external debt remains elevated, reaching a high of 47.9% of GDP (USD122.9bn) in FY20/21, short-term gross external debt remains low, coming in at 1.7% of GDP (USD4.3bn). Pakistan’s involvement in the G20’s Debt Service Suspension Initiative has eased the need for short-term repayments amounting to USD3.7bn across a five- or six-year period,” said Fitch.

Meanwhile, external financing prospects remain robust. Loans from bilateral and multilateral sources have amounted to USD7.7bn in the first nine months of FY20/21, mostly from the Asian Development Bank, World Bank, IMF and China. Furthermore, Pakistan has managed to raise an additional $1 billion in July through the issuance of its eurobonds, alongside the new global, special drawing rights disbursement of USD2.8bn by the IMF.

“Consequently, we forecast reserves (excluding gold) to come in at approximately USD20.8bn in FY 2021-22, which represents an import coverage ratio of 3.6 months. This is slightly higher than the IMF’s recommended minimum of 3.0 months and is also relatively better than the average import coverage ratio of 2.7 months across FY16/17- FY20/21,” said Fitch. On the upside, the sixth review of the IMF Extended Fund Facility programme will further disburse approximately $1.1 billion should a consensus be reached.