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CAD shrinks on rupee depreciation

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Pakistan’s current account deficit (CAD) dropped to a nearly two-year low in February 2023 as the country’s imports were reduced due to administrative controls and rupee depreciation, according to data from the State Bank of Pakistan (SBP). The CAD narrowed 86% to $74 million in February, the smallest since March 2021. The deficit shrank 68% to $3.9 billion in the eight months of the current fiscal year. This decrease was in line with the expectations of analysts, who credited weaker currency, import restrictions, curbs on foreign exchange availability, fiscal tightening, higher interest rates, and energy conservation measures for the reduction in the current account deficit.

However, exports declined 24% YoY to $2.198 billion in February, and during July-February FY2023, exports decreased by 10% to $18.639 billion. This decline in exports was attributed to temporary administrative constraints. Remittance inflows improved 5% MoM to $2 billion in February but fell by 9.5% YoY.

Pakistan is facing difficulty in securing a staff-level agreement with the International Monetary Fund (IMF), and failure to secure the deal could lead to a sovereign default. The political and economic unrest in the country may make it challenging to obtain funds from the IMF, making it essential for Pakistan to secure the staff-level agreement to obtain a $1.2 billion tranche and unlock further inflows from other international creditors.

Despite the reduction in the CAD, external public-debt maturities in the remainder of the fiscal year ending June 2023 amount to over $7 billion and will remain high in FY2024, according to a Fitch report. The Chinese government has refinanced commercial loans to prevent Islamabad from defaulting, but the government is still awaiting the rollover of a $2 billion Chinese deposit that will mature on March 23 and a $1 billion deposit that will mature in June.

As of March 10, the foreign exchange reserves held by the SBP were $4.319 billion, which is still low, but adequate to avoid default thanks to the Chinese inflows. Experts noted that while the current account deficit is not much of a problem, debt repayments are the real challenge faced by Pakistan.

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