Maintaining the improvement in external account would be challenging, as after the sharp rise in the last four successive years, the current account deficit contracted considerably to 5.3 percent of GDP during FY09 from 8.4 percent in FY08. SBP said in its annual report that the improvement in current account deficit offset the fall in financial account surplus during the period.
Consequently, overall external account deficit declined by 40.1 percent in FY09. The report said that entire improvement in the annual external account picture accrued during the November-June FY09 period. During July-October FY09, higher import prices and sharp fall in financial inflows led to substantial pressure on exchange rate and rapid depletion of foreign exchange reserves.
Given the severity of the situation and inability to access international capital markets in light of global financial crisis, Pakistan had no option but to approach International Monetary Fund to avoid the risk of a balance of payment crisis. The subsequent implementation of a macroeconomic stabilisation programme led to a marked improvement in the external account position in the ensuing months (November-June FY09).
Looking ahead, maintaining improvement in external account would be challenging, the report said and added that on the one hand, further contraction in current account deficit would be difficult in light of downside risk to remittances inflows and likely increase in imports owing to recovery of commodity prices in international market and revival of domestic economic activity.
On the other hand, investment inflows are subjected to large risks, as Pakistan's sovereign credit risk is still considerably high and prospects for world investment remain uncertain. Thus, Pakistan would have to rely on loan inflows to finance current account deficit, it added.
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