Macro Analysis /

Pakistan Economy: Balance of Payments – Another large CAD in August

  • Pakistan’s CAD swells past US$1.0bn again in August 2021

  • This is almost entirely attributed to the rise in imports, while exports and remittances remain healthy

  • We expect CAD to normalise to less than US$1bn per month but the PKR should remain under pressure

Intermarket Securities
17 September 2021

C/A deficit nearly doubles mom to US$1.5bn in August

As per SBP data, Pakistan’s current account deficit (CAD) in August 2021 almost doubled mom to US$1.48bn, up from US$0.8bn in July. The near US$1.0bn mom increase in CAD is almost mirrored by the mom increase in imports. The much larger CAD is not surprising given the c.6% PKR devaluation in the past two months. The present level of CAD is not sustainable; it will keep the currency under pressure and could trigger earlier than expected interest rate hikes, in our view. However, we explain below that some normalization in CAD in the coming months is possible.      

Goods trade deficit stood at US$3.66bn in August, up 16% mom and doubled yoy. Exports rose 4% mom to US$2.35bn near the record level set only recently but not enough to match the increase in Imports, which rose 11% mom and surpassed the US$6.0bn mark again. Notably, the imports of Palm oil, LNG, mobile phones and electric appliances (not industrial machinery), and vaccines contributed nearly 80% of the mom increase in Imports. As per channel checks, TERF related machinery imports will last until October only, and Petroleum demand softens considerably during winter; these could cool off overall imports in the coming months, in our view, while exports and remittances are very likely to maintain the present healthy levels. Also, the Finance Minister has guided the Commerce Ministry to look for ways to contain the rise in imports, which can culminate in higher duties on non-essential imports (but with a lag effect).                

Remittances remained strong at US$2.66bn (nearly flat mom). Even though Eid-ul-Azha fell in July, there has been no let-up in remittances ever since – meaning Pakistan can sustain the present rate, regardless of the state of global pandemic. This is partly due to the surge in global oil prices, which have revived the GCC economies (they collectively have the lion’s share). Also, as per the SBP, there has been a consistent net outflow of human resource from Pakistan in the past few months, suggesting greater stickiness in future.         

SBP’s FX reserves rise to all-time high level of US$20bn

Notably, Pakistan received US$2.77bn from the IMF under the SDR allocation, which took SBP’s forex reserves to an all-time high level of over US$20bn. But it could not arrest the continuous decline in the exchange rate (PKR has depreciated nearly 6% against USD since end-June 2021), partly because of the pressure from CAD and limited SBP intervention. In the coming months, while CAD should normalise to less than US$1.0bn per month, an international Sukuk issue of US$1.0bn will mature by mid-October. As a result, we think that the PKR/USD would remain under pressure until December 2021.