C/A deficit to improve further inremaining months of FY19
Along with Saudi deferred oil payment facilities, forex inflows are vital in meeting the
external financing gap for FY19, relieving pressure on the foreign exchange reserves
M Jahangir Hayat
LAHORE: The Current Account Deficit (CAD) is likely to further improve in the remaining months as
imports are likely to contract further on account of moderating domestic demand and relatively low
international oil price as compared to that at the beginning of FY19, the State Bank of Pakistan’s recent
Earlier the CAD has improved by USD 1.7 billion during the first seven months of FY19. However, it is still
high at USD 8.4 billion.
Overall the report said that the real GDP growth during FY19 is likely to moderate significantly, mainly
due to slowdown in the growth of the agriculture sector and stabilization measures taken to preserve
macroeconomic stability, the SBP said adding, this is in line with a further contraction in Large Scale
Manufacturing (LSM) during Q2-FY19.
Moreover, given that public development spending, a key driver for private sector industrial activities, is
unlikely to pick up anytime soon, the full year outlook for manufacturing activities remains subdued, it
Furthermore, private consumption is going to remain lower due to tighter monetary policy and pass
through of exchange rate depreciation that has resulted in both higher energy prices and core inflation,
the report added, explaining the prospects for the upcoming wheat crop remain subdued in terms of
All these aspects are going to constrain the services sector in the coming months as well, the report
Therefore, SBP has revised down its projection for real GDP growth during FY19 by 0.5 percent to 3.5-
4.0 percent, it highlighted.
Regarding price pressures, inflation is expected to remain high in second half (H2)-FY19. This is due to
the second round impact of recent exchange rate depreciations, an upward adjustment in gas and
electricity prices and higher budgetary borrowing from SBP.
However, the lagged impact of policy rate increases would be instrumental in keeping demand
pressures in check, the SBP said saying that acknowledging these risks, SBP continues to project average
CPI inflation at 6.5-7.5 percent for the full year.
As noted earlier, the primary deficit has increased further while there has been a sharp reduction in
development expenditures in order to improve the fiscal position, it explained, adding this situation has
become more challenging as the growth in current expenditure inched up to 17.3 percent during the
first half as compared to 13.5 percent last year.
On the contrary, revenue collection has contracted by 2.4 percent during the same period as compared
to the growth of 19.8 percent last year, the report said, since there is limited room to curtail
government expenditures in the coming months, it is the growth in revenues that would be instrumental
in determining the overall fiscal position for FY19.
Incorporating the performance of revenue collection during the second half in the last four years, SBP
projects fiscal deficit to further deteriorate by 0.5 percent of GDP, which brings it close to the same level
as in FY18, it added, going forward as for the external sector, while the Current Account Deficit (CAD)
has improved by USD 1.7 billion during the first seven months of FY19, it is still high at USD 8.4 billion.
Some improvement is expected to continue in the remaining months as imports are likely to contract
further on account of moderating domestic demand and relatively low international oil price as
compared to that at the beginning of FY19, the report observed.
International price of Brent crude was about USD 75 per barrel in July 2018 which dropped to about
USD 57 per barrel in December 2018. The World Bank projects the international oil price to remain
around USD 67 per barrel on average during 2019 and 2020, it added.
However, merchandize exports are expected to miss the target due to waning demand in certain export
Additionally, this is compounded by the competitive pressures in the international arena and the lack of
diversified and higher value added products that can effectively utilise the export quotas allowed under
specific trade agreements, it said.
Meanwhile on the external financing front, the efforts of the government have started to materialize in
the shape of bilateral inflows from Saudi Arabia, UAE and China where some of these inflows have
already been realized, while rest are due in H2-FY19, it explained.
Along with the Saudi deferred oil payment facilities, these inflows have an important role in meeting the
external financing gap for FY19; thereby, relieving pressure on the foreign exchange reserves and
mitigating volatility in the FX market, the report concluded.