Fuelled by a huge $5.26 billion trade imbalance in goods and services, Pakistan's 'current-account deficit', excluding official transfers, during the first four months of the current fiscal year rose to $3.42 billion, depicting an increase of 53.48 percent over $2.23 billion of corresponding period of last year, State Bank of Pakistan (SBP) announced on Monday.
During July-October 2006, the imbalances in the trade and services were so large that it plunged the current account underwater in spite of strong buildup in current transfers. The net current transfers rose to $3.047 billion during the period under review, from $2.693 billion.
More worrisome was that resident deposit holders withdrew $53 million from foreign currency accounts (FCA) during the period, primarily because of the stable rupee, against the same amount of $53 million they deposited during the same period of last fiscal year.
All three multilateral donors--World Bank, Asian Development Bank and International Monetary Fund--have time and again cautioned the government by pinpointing the burgeoning 'current account' as 'grey area' of the country's economy.
During 2005-06, the deficit rose to $5.7 billion against $1.784 billion in 2004-05. As percentage of GDP, it rose from 1.6 to 4.4, the highest level in last nine years. And now for 2006-07, the World Bank has forecast it at 5 to 5.5 percent, and IMF at 5.6 percent of GDP by the end of the year.
The Asian Development Bank (ADB) in its 'Outlook' last month had also projected it at $8.5 billion (5.9 percent of GDP) for 2006-07. On the other hand, the government's economic managers are confident that the current account deficit is manageable by borrowing from abroad, remittances, drawing down reserves and inflow of investment.
The SBP data shows that Pakistan has witnessed this current account imbalance as trade deficit (in goods and services) jumped to $5.26 billion during July-October 2006 against $4.07 billion of last year. The trade deficit figures have been arrived at using the freight-on-board value of imports and exports.
The report says that goods import stood at $9.13 billion whereas exports totalled $5.44 billion, thus leaving a trade imbalance (in goods) of $3.68 billion. The services account also witnessed a sizeable imbalance of $1.57 billion during July-October 2006 as inflows under this account stood at $1.043 billion whereas outflows totalled $2.615 billion. Thus, on balance, total trade deficit (goods and services) stood at $5.258 billion.
The factors responsible for this huge deficit in services sector included higher outflows on account of transportation, travel, insurance, royalties and licence fees.
Pakistan had to spend $1.032 billion on transportation account whereas its earning under this head was only $390 million. Thus, the net deficit in the service account due to chartering of vessels for imports and export was $642 million.
Another factor responsible for the deficit was net outflow of $364 million on account of overseas travelling. Pakistan had to spend $442 million to finance personal and business-related travelling abroad of individuals and groups whereas it earned only $78 million under this account. Hence, the services account witnessed deficit in July-October 2006. The same applies to spending on insurance, royalties and licence fees paid to international organisations and their employees operating in Pakistan.
Independent economists are of the view that the widening current account deficit is posing threat to the economy simultaneously on both internal and external fronts. They have also questioned time and again how long the trade deficit can continue on that trajectory without disrupting the economy; and how much longer Pakistan can continue to spend more than it earns and support the growth.
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