State Bank of Pakistan (SBP) has expressed optimism that the current account deficit may be contained to a manageable level in coming months due to recent measures taken to arrest the decline in foreign exchange reserves. Sources said a working paper submitted in response to recommendations of the Senate Standing Committee on Finance by the SBP highlighted various measures to contain the potential risks emerging from the external sector.
The government and SBP have taken various steps to deal with problem. The government ensured un-interpreted energy supplies to export sectors, especially to the textiles sector, to facilitate exports and exporters are also expected to benefit from a reduction in the cost of doing business due to growing use of LNG in power production. Export package of Rs 180 billion had already been announced.
Additionally, for non-textile sector, duty drawback package was also announced for sports, surgical & leather products under which an exporter can get a 50 percent rebate unconditionally while the remaining 50 percent rebate is subject to its export performance.
The government has also strived actively to get market access in Russia, China, South Africa, Egypt, Hong Kong and Indonesia, besides Middle-East countries, for export of meat and meat products. Moreover, abolishment of an 8-year-old ban by the UAE on Pakistani poultry products provided a huge market to meat exporters of Pakistan.
The government also negotiated the 2nd Round of Free Trade Agreement with China to enhance Pakistan's exports to China. Due to this, export outlook for seafood and rice appear to be promising.
The SBP imposed 100 percent cash margin requirement on imports of 'non-essential and luxury' consumer items in February 2017 to curb unnecessary imports. This measure is further reinforced by the government's recent increase in the regulatory duties on import of 731 non-essential items, stated the SBP while adding that furthermore, the healthy growth in the US, the EU and the UK economies would have a positive impact on the country's remittance inflows in the years ahead. The UAE Expo 2020 and Qatar FIFA world cup in 2022 would also help improve remittances in the coming years.
Together with these measures and development, recent recovery in exports along with these measures, the current account deficit may be contained to a manageable level in coming months. This could help in arresting recent decline in the foreign exchange reserves. The planned official inflows under multilateral and bilateral arrangements would also help recover foreign exchange reserves in comings months.
Sources said that according to SBP brief, the SBP's net liquid foreign exchange reserves declined from US $18.925 billion at end-October 2016 to US $13.668 billion by 10th November 2017, indicating a net decrease of US $5.257 billion during this period.
The decline in the SBP's foreign exchange reserve is primarily attributed to widening external current account deficit and subdued foreign financial flows. Specifically, external current account deficit increased to US $12.4 billion during 2016-17 as compared to US $4.9 billion in 2015-16. Strong growth in productive imports along with stagnant exports and a small decline in workers' remittance were the major contributory factors.