A fragile BoP

The statistics on the balance of payments (BoP) of Pakistan have been released recently by the State Bank of Pakistan (SBP) for July 2022. Apparently, there is the good news that the current account deficit has come down sharply by 44 percent to $1.2 billion from $2.2 billion in June 2022.

However, the deficit has increased by 42 percent in relation to the level of 0.8 billion in July 21. Also, if the deficit remains on a monthly basis close to $1.2 billion, then the annual current account deficit will exceed $14 billion. The target is to bring it down from over $ 17 billion in 2021-22 to $9 billion in 2022-23. Now for the remaining eleven months of 2022-23 if the target is to be achieved, the average monthly deficit will have to be severely restricted to $0.7 billion only.

The balance of trade in goods is down by 21 percent in July in relation to the level in June despite the big drop of 23 percent in imports, because exports have also fallen significantly by 27 percent. This is ominous and indicates that the global recession is beginning to impact on exports of developing countries, including Pakistan’s.

A significant positive development is the big drop of 62 percent in the balance of trade in services. This is due to the 40 percent decline in imports of services and a smaller fall of 17 percent in the export of services. Earlier, exports of services had begun to display some dynamism.

The balance in primary income in July 22 is marginally smaller than the level in June 22. However, it is up by as much as 39 percent in relation to June 21. Presumably, this reflects higher interest payments on the larger stock of external debt.

Another worrying development, along with the fall in exports, is the decline of 9 percent in remittances in relation to the level in the previous month. With the recession in the USA and the UK, remittances from these two countries have fallen by 11 percent and 9 percent, respectively. The decline in remittances from Saudi Arabia and the UAE is hopefully temporary in nature.

The matter of greatest concern is the transformation of the financial account from being in surplus to a deficit. It was in surplus by $2.7 billion in June 22 but there is now a deficit of $0.8 billion in July 22. Similarly, there was also a surplus of $1.3 billion in July 21. The simultaneous occurrence of deficits in the financial and current accounts of the balance of payments is very unusual and sharply highlights the worsening financial situation of Pakistan.

Why has the financial account gone into a deficit? First, foreign direct investment to Pakistan has, more or less, ceased. It is down to only $25 billion as compared to $237 billion in June 22. Second, there continues to be exit of portfolio funds from Pakistan. Both these negative developments highlight the growing perceptions of risk of investing in Pakistan due to the absence of both economic and political stability. The downgrading of Pakistan’s credit rating from ‘stable’ to ‘negative’ has also reinforced the negative perceptions of foreign investors.

The other major negative development is the ebbing of the inflow of assistance to government. It is down to a mere $179 million, as compared to $2915 million in the previous month. Clearly, multilateral agencies and bilaterals are waiting for the IMF Programme to becoming operational once again before committing more funds to Pakistan.

Simultaneously, the amortization payment has jumped up massively by 159 percent. Overall, there has been a net outflow of funds of $642 million from the government account at a time when Pakistan desperately needs more financing.

Based on a negative balance in both the current and financial accounts, it is not surprising that in the month of July 22 the overall external balance of payments has gone into a big deficit of $1.8 billion. Consequently, foreign exchange reserves have declined to $8.3 billion as of the end of July 22. They are not even adequate to provide for an import reserve cover of one and a half months.

Pakistan cannot experience again an outcome of the type seen in July 22. There is the risk that reserves could then fall to a perilously low level and lead to a big run against the rupee. Already, in July the rupee depreciated by more than 17 percent.

The task of controlling the current account deficit by reducing imports has been rendered even more difficult by the withdrawal of physical controls on the insistence of the IMF (International Monetary Fund). Higher regulatory duties will help, albeit partially. Meanwhile, exports have started falling and so have remittances.

Restricting the monthly current account deficit in coming months to $0.7 billion appears to be a near impossible task. Draconian policy moves will be required in coming weeks, unless the resumption of the IMF programme facilitates the inflows of substantially larger multilateral and bilateral assistance, whereby some space may be created for a somewhat large current account deficit in the balance of payments.

Copyright Business Recorder, 2022