Macro Analysis /

Pakistan Economy – Balance of payments: CAD worsens to a 34-month high

  • CAD in October ballooned to a 34-month high of US$1.66bn

  • Imports were stagnant, but exports and remittances moderated a little from record levels

  • PKR has depreciated a further c.2% against the USD since the start of October to 174

Saad Ali
Saad Ali

Head of Research

Intermarket Securities
22 November 2021

C/A deficit worsens to US$1.66bn

As per SBP data, Pakistan’s current account deficit (CAD) swelled to US$1.66bn in October 2021, up c.47% mom, which is the worst level since Dec 2018. While imports were flat mom, the enlarged deficit is due to a mild reduction of c.US$200mn in both exports and remittances, and larger deficits in Services and Income balances (the latter due to greater interest payments on external debt).         

Goods trade deficit stood at US$3.6bn in October, up from US$3.4bn the previous month, due to 7% mom lower exports (at US$2.4bn). According to PBS data, Textile exports rose c.8% mom to US$1.60bn (the second highest ever level), but non-textile exports fell 6% mom (broad-based decline). Imports remained at c.US$6.0bn for the third consecutive month, where those of machinery, food and motor vehicles fell 12-15% mom but Petroleum imports rose c.7% mom to US$1.60bn (now a quarter of total imports), as per PBS data. Note that without Petroleum imports, the current account is nearly in balance.

Looking ahead, Textile exports could be tested by a new wave of lockdowns across Europe (if prolonged), even though the bulk of the orders for winter (peak season) are shipped by October. As per the SBP, about US$1.4bn have been disbursed out of the total US$2.6bn TERF loans; machinery imports can thus remain high in the coming months. Petroleum imports in winter tend to fall sharply, but global LNG prices may shave off some of those gains, in our view. All in all, we see little improvement in the goods trade deficit in the next two months.                 

Remittances fell slightly to c.US$2.5bn after sustaining the c.US$2.7bn level in the prior four months. Since early November, Pakistan allowed air traffic to resume to pre-pandemic levels. This can lead to a moderate reduction in remittances in the coming months. But global oil prices have rebounded (good for GCC economies) and there has been a consistent net outflow of workers from Pakistan in recent months.   

SBP’s Fx reserves and PKR fall sharply in October

SBP’s Forex reserves fell below US$17.2bn at the end of October from US$19.2bn at September end, thanks in part to the repayment of US$1bn international Sukuk during the month. By mid-November, the reserves have continued to fall to under US$17bn. As a result, the PKR has depreciated a further c.2% against the USD since the start of October to 174 (down c.8% FY22td). Nonetheless, Pakistan is set to receive US$3bn from Saudi Arabia as bilateral assistance; which, in combination with the recent monetary tightening and potential IMF program resumption should reverse this spell of devaluation, in our view.