The improvement in overall external accounts recorded during the first quarter of the financial year could not be sustained in the ensuing months of October-February and the situation could again become more serious in the months ahead, warns the State Bank of Pakistan.
The second quarterly report, issued on Monday, points out that some part of this monthly deterioration owed to seasonal or one-off factors; however, anticipated increase in imports led by domestic demand and high average import prices could further weaken the current account balance in the months ahead. Moreover, there is a risk that remittances inflows may further lose momentum as already evident from month to month decline.
Investment inflows are expected to remain weak amid impaired ability to tap international capital market and uncertainty about realisation of Tokyo pledges pose a risk to current account at book, says the SBP report.
A fall in investment relate of outflows was observed during, October-February period, which was largely due to the circular debt and low average price of oil and gas. Circular debt hampered companies' operations by affecting their cash flows while low average oil and gas prices led to inventory and revenue losses.
The impact of these factors is more pronounced on the purchase of crude oil and mineral (which is a function of oil and gas extraction and their prices) and dividend payments of oil and gas, petroleum refinery and power sectors. Oil and gas extraction was also adversely affected by poor law an order situation and the ageing impact of oil fields. As a result, not only purchase of crude oil and mineral (which constitutes around 50 percent of investment related outflows) has fallen considerably but repatriation of profits and dividends of oil and gas sector also reduced substantially.
Falling profitability of financial business amid weak economic growth is another factor behind lower repatriation of profit and dividends during the period under review. Moreover, a nominal fall in investment stock in equity markets may also have lowered repatriation of profits and dividends.
The only exception, says the SBP report, was the telecommunication sector which recorded an increase in repatriation of profit during July to February. Lower interest payments due to relatively low interest rate were partly offset by increase in interest payments on IMF loans and a decline in interest earnings on forex reserves, according to the report.
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