Islamabad, June 8, 2023 – The recently released Pakistan Economic Survey 2022-23 highlights that Pakistan has successfully managed to contain its current account deficit by implementing import restrictions. However, the pressure on foreign exchange reserves persists, creating challenges for the economy.
The survey emphasizes that the balance of payments position during July-March FY2023 remained strained due to unfavorable global shocks and domestic developments. The global commodity prices have remained high since the pre-pandemic era, adversely impacting the external account. Additionally, the tightening of the global financial environment has made it difficult for emerging markets like Pakistan to access international financial markets, further pressurizing foreign exchange reserves and exchange rates.
Moreover, the devastating floods in July-August 2022 exacerbated the already gloomy economic conditions. Despite the challenging circumstances, Pakistan managed to reduce its current account deficit (CAD) by 76 percent. The CAD stood at US$ 3.3 billion during July-April FY2023, compared to a deficit of US$ 13.7 billion in the same period last year.
The improvement in CAD was primarily driven by a significant decline in imports, which decreased by 23 percent in July-April FY2023. However, despite the reduced CAD and lower multilateral inflows, the State Bank of Pakistan’s foreign exchange reserves witnessed a decline due to the amortization of official loans and liabilities. By the end of April 2023, the reserves had reached US$ 4.5 billion.
To alleviate the pressure on foreign exchange markets, the average monthly exchange rate of the Pakistani Rupee (PKR) against the US Dollar (USD) depreciated by 27.8 percent during July-April FY2023.
The global economy continues to face multiple challenges, such as the Russia-Ukraine war, inflationary pressures, tightening monetary policies, and a slowdown in global trade. Domestically, factors such as the devastating floods and supply disruptions have negatively impacted exports. Consequently, the current account deficit for Jul-Mar FY2023 stood at US$ 3.4 billion, reflecting a decline of around 74.1 percent compared to the same period last year. This decline is primarily attributed to reduced imports, which have offset the combined decline in remittances and exports.
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Although the current account deficit was projected to be 2.2 percent of GDP at the start of FY2023, it is now expected to remain around 1 to 1.5 percent of GDP due to the controlled import bill. However, the higher loan repayments in comparison to disbursements continue to exert pressure on foreign exchange reserves.
Looking ahead, the survey suggests that the prospects for export growth in the coming year (FY2024) are more favorable due to a better global trade outlook, the revival of growth in trading partners, and improved global and domestic supply chains. Furthermore, the recent elimination of import restrictions and efforts to stimulate domestic economic activities are expected to increase imports in FY2024. Additionally, the improved economic situation in host countries is projected to significantly boost remittances. These factors collectively aim to make the external sector more sustainable in FY2024.
Overall, while Pakistan has successfully contained its current account deficit through import restrictions, the pressure on foreign exchange reserves remains a challenge. The government’s focus on improving exports, attracting investments, and addressing domestic economic issues is crucial to ensure a more stable economic outlook in the future.
