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The balance of payments for the month of August 2022 shows a visible improvement. Not only has the current account deficit fallen sharply by 42% in relation to the level of July 2022, there has also been an overall balance of payments surplus of $439 million, as compared to a deficit of $1775 million in July 2022. The financial account shows a surplus of $1161 million, whereas there was a deficit in this account of $663 million in July.

Further, the trade in goods has shown a smaller deficit by 4.3% in comparison to the magnitude in July. This is due to a large increase in exports of 23.4% and a relatively small rise in imports of 7.5%.

The big surprise is the decline in the deficit on primary income of 62.4% in the first two months of 2022-23. Interest payments have been rising and the decline is probably due to a fall in the repatriation of profits by multinational companies. Is this due to restrictions placed by the SBP (State Bank of Pakistan) to reduce the pressure on the current account? If so, then this is likely to have a big negative impact on future inflows of foreign direct investment.

Workers’ remittances have also shown an upward trend. The level in August 2022 is $2724 million, which is 7.9% higher than the level in July. However, the remittances combined in the first two months of 2022-23 are 3.2% lower than the level in the corresponding period of 2021-22. It is perhaps surprising that the fall in remittances is from the Middle East, when the likelihood was that the flow would decline from the USA and the UK, given the looming recession.

Turning to the financial account of the balance of payments, while there is an improvement from July to August 2022, there has been a massive decline in relation to the balance in the first two months of 2021-22. It is $498 million as compared to $4913 million last year. This was due to the receipt of $2773 million of SDRs in August 2021.

Similarly, there is a big fall in foreign investment in relation to last year. It is only $144 million as compared to $1191 million in the first two months of 2021-22. This clearly reflects the higher negative perceptions of foreign investors of the fragile state of the economy and the political imbroglio. This perception will now be further augmented by the floods.

The gross inflow into the Government account is $1509 million, 88.6% which has come in August 2022. This is 21.7% above the disbursement in the first two months of 2021-22. However, the amortization has been much larger – by 280%. Consequently, the net inflow into the Government account is only $181 million, 84% less than in the corresponding period of last year.

Overall, there is a surplus in the balance payments in August of $439 million. However, the large deficit in July 2022 of $1776 million has implied that the combined position is a deficit of $1337 million. This is in sharp contrast to a large balance of payments surplus in July and August 2021-22 of $2842 million, thanks largely to the receipt of $2773 million worth of SDRs.

The consequence is that foreign exchange reserves have fallen from $9816 million on end-June 2022 to $8834 million as of end-August 2022. The import cover by the reserves is down to only 1.2 months. This is one of the reasons why the Rupee has continued to plummet in recent weeks. During July and August 2022, the fall in the value is of 7.5%. This process of decline has continued in September.

Therefore, while there has been a significant improvement in the balance of payments in August as compared to July 2022, the combined two-month position is worrying as reserves have fallen from an already low level at the end of 2021-22 by 10%. Clearly, drastic measures are required to increase reserves in coming months.

There is need to compare the performance in the first two months with the targets agreed with the IMF as part of the on-going EFF. The annual target for the current account deficit in 2022-23 has been set at $9.3 billion. Therefore, on average over a two-month period, the current account deficit is to be restricted to $1.550 billion. Instead, the actual deficit is $1.918 billion, higher by almost 24%. Clearly, exports will have to show faster growth and imports to decline more over the next two months.

The 2022-23 Federal Budget is based on the expectation that the gross external inflow of loans will be close to $30 billion. Therefore, the expected disbursement of external assistance is $5 billion on average in every two months of 2022-23. The actual gross inflow in July and August was only $1.6 billion. Presumably, this reflects the reluctance of multilateral agencies and bilaterals to extend support to Pakistan in the absence of an operative IMF programme. Following the successful completion of the seventh and eighth reviews and extension of the programme to June 23, there should be a sizeable increase in the inflow of foreign assistance.

The extremely destructive floods are likely to raise significantly the external financing requirements for 2022-23. Imports, especially of cotton, wheat, and other food items, are likely to be larger, while exports, especially of textiles and rice, could be negatively impacted. Also, more funds will be required for relief and rehabilitation. Therefore, there is much greater risk now that the current account deficit will be significantly larger. Unless the donors fully realize the emergency needs of Pakistan, foreign exchange reserves could fall to a critical low level and lead to further exponential decline in the value of the rupee. We hope and pray that such a crisis situation will be avoided.

Copyright Business Recorder, 2022

Dr Hafiz A Pasha

The writer is Professor Emeritus at BNU and former Federal Minister

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