FY12 C/A target missed

RECORDER REPORT

KARACHI: The country has missed the target of current account balance as a deficit of 2 percent of Gross Domestic Product (GDP) has been registered during fiscal year 2011-12 (FY12) against a target of 0.6 percent.

Economists said the deterioration in the external account is as per expectations as the expected foreign inflows were not matured during the last fiscal year and resulted in high pressure on external account, which was surplus a year earlier.

The State Bank of Pakistan on Tuesday said the country’s current account balance has posted a deficit of $4.517 billion during FY12 as compared to a surplus of $214 million in FY11. The cumulative deficit of trade, services and income stood at $21.801 billion against current account transfers of $17.404 billion.

The government was expecting a lower external account deficit during last fiscal year and set a target of 0.6 percent of GDP for current account, however current account has closed with a huge deficit of 2 percent of GDP, which is much higher than expectations as well as target.

Nonetheless, this deficit is as per the SBP prediction as it projected a deficit of 1.5 to 2.5 percent of GDP during FY12.

Economists said current account balance was adverse as per expectations and financing of the current account deficit remained challenging during the last fiscal year. Despite strong growth in tax collection, there was pressure on the fiscal account, they added.

“The expected inflows under Coalition Support Fund (CSF), auction of 3G licenses and arrears from PTCL privatization, did not materialize during FY12 and resulted in high current account deficit,” said Muzammil Aslam, Managing Director Emerging Economic Consultancy.

He said deterioration in current account balance is not good for the economy as every month government is spending millions of dollars to finance this balance. In the past high current account deficit forced Pakistan to rejoin International Monetary Fund (IMF), he added.

“High deficit ate away some four billion dollars from the foreign exchange reserves held by the central bank. SBP’s foreign exchange reserves fell to $10.802 billion by end-June 2012, from $ 14.786 billion as on July 1, 2011. The SBP’s reserves saw decline throughout FY12, whereas forex reserves of scheduled banks increased during this period,” he added.

However, he said with the resumption of Nato supply there are hopes that the US will release funds particularly amounts of $1.5 billion of Coalition Support Fund withheld for one year.

“3G auction is also expected to be matured during current fiscal year, therefore there are some hopes that end of FY13 current account balance will be better than FY12,” Muzammil said. It’s urgently needed to take some steps to curtail this upward trend otherwise the country’s depleting foreign exchange reserves will further reduce, he added.

The State Bank statistics showed that cumulative deficit of goods, services and income moved up by 41 percent during the period under review. With current upsurge, total deficit of goods, services and income surged to $21.801 billion in FY12 against a deficit of $15.473 billion in FY11.

Major growth has been witnessed in goods deficit, which posted an increase of 46 percent during last fiscal year. The country’s overall goods imports stood at $40.03 billion and exports at $24.655 billion with a trade deficit of $15.381 billion during FY12. Previously, the deficit stood at $10.516 billion in FY11, depicting an increase of $4.865 billion.

With an increase of 55 percent or $1.07 billion, the deficit of services sector has reached $3 billion from $1.9 billion. During this period services exports stood at some $5 billion and imports at $7.9 billion.

Similarly, with $4.227 billion payments and $820 million income, income sector deficit mounted to $3.4 billion during last fiscal year.

Meanwhile, month on month basis, current account balance posted a deficit of $586 million along with $1.53 billion current account transfers and a cumulative deficit of goods, services and income worth $2.1 billion.

After a gap of six years, the country’s current account balance became positive and surplus by $214 million in fiscal year 2010-11 (FY11) compared with $3.94 billion deficit in fiscal year 2010 primarily driven by all-time high inflows of home remittances and exports. However, since the beginning of fiscal year 2011-12, current account deficit is growing rapidly followed by high trade deficit and slow foreign inflows. In November 2009, due to rising current account deficit, Pakistan was compelled to rejoin the International Monetary Fund and get a loan of $11.3 billion under Standby Arrangement (SBA) to avoid default on the international front. The tranche of SBA is stopped for last one year because of some policy differences between Pakistan and the IMF.