- FY15 has started on a negative note where the current account (C/A) posted a deficit of US$454mn in July 2014 vs. a C/A deficit of US$125mn in the same period last year.
- Deterioration in July 2014 C/A is on the back of (1) 52%YoY higher trade deficit and (2) 16%YoY increase in the balance on primary income.
- With limited inflows, Pakistan ‘s overall Balance of Payments (BoP) clocked up a deficit of US$348mn in July 2014 vs. US$507mn surplus in June 2014. This along with the prevailing political deadlock has resulted in Pak rupee depreciating by 2.9% in August 2014.
- FX reserves may get a boost once IMF releases the fifth tranche under the EFF. However, we do not expect IMF to accord approval to the release of the fifth tranche until the current political deadlock is resolved.
C/A deficit in July 2014 highest since November 2013
Pakistan’s Current Account (CA) kicked off the new fiscal year (FY15) on a negative note where the C/A registered a deficit of US$454mn in July 2014. This compared to July 2013 (C/A deficit of US$125mn) is 3.6x YoY higher. C/A deficit in July 2014 also compares negatively to the US$135mn C/A deficit in June 2014. Moreover, the figure this month is the highest since November 2013 when the C/A deficit amounted to US$572mn. Deterioration in the current account was on the back of 52% YoY higher trade deficit as July 2014 exports dipped by 13% YoY while imports surged by 10%YoY. Meanwhile, 16%YoY increase in the balance on primary income also dented the current account balance. On a positive note, inwards remittances witnessed sharp growth for the month (due to Ramadan/Eid effect), where July 2014 remittances clocked in at US$1.65bn, up 17% YoY and 10% MoM, which supported overall balance on secondary income.
BoP in the red zone after 5 consecutive months of surplus
After five consecutive months of Balance of Payment Surplus, July 2014 posted a deficit of US$348mn because of limited inflows during the month. However, FX reserves of the State Bank of Pakistan still increased by 1.8%MoM to US$9.3bn as Pakistan received US$556 million from IMF in early July. Note that since then FX reserves held by the SBP have declined to US$8.9bn (on account of debt repayments and limited foreign inflows) and Pak rupee has depreciated by 2.9% in August 2014. Note that FX reserves may get a boost once IMF releases the fifth tranche under the EFF. However, we do not expect IMF to accord approval to the release of the fifth tranche until the current political deadlock is resolved.