Macro Analysis /

Pakistan economy: Balance of payments update – Higher CAD offset by debt inflows

  • Pakistan’s current account deficit expanded in April to US$572mn vs. an average run rate of US$350mn in prior months

  • Exports fell sharply while remittances & imports declined moderately; external assistance amid Covid-19 was key to BoP

  • We expect CAD to expand further in coming months; timely realisation of committed external assistance is paramount

Intermarket Securities
29 May 2020

C/A deficit expands in April…

As per SBP data, Pakistan’s current account deficit (CAD) in April 2020 clocked in at US$572mn (down 51% yoy) compared to US$9mn in March and an average monthly run rate of c.US$350mn in FY20 so far. Note that April was the first full month of lockdown in the country (in place since 24 March 2020). Globally, lockdowns have been in place much earlier. 

Trade deficit expanded to US$1.8bn in April because of a 24% mom decline in exports (mostly in Textiles, which are largely Europe and US bound). The reduction in imports, in comparison, was more moderate sequentially (down 4% mom). Remittances fell 5% mom (to US$1.8bn) and were enough to offset the goods trade deficit. Therefore, the negative Services and Income balances majorly comprised the CAD in April.

…but is more than offset by multilateral inflows

The external outflows in April – CAD, debt repayments and foreign outflow from government securities – were more than matched by the US$1.4bn IMF disbursement (new RFI program) and other multilateral assistance. SBP’s Forex reserves thus rose 14% mom to US$12.3bn at April end (equivalent to c.4mths import cover). This also explains the relative stability in the exchange rate since March. In the coming months, assuming a potentially larger CAD, net inflows in the financial account could emanate from suspension of repayments to G-20 countries and multilateral assistance (ADB and World Bank in particular).

Greater fallout in CAD expected from May onwards

We think that the April CAD does not fully capture the impact of the Covid-19 pandemic, and the outturn in May could be worse. One, April exports data by PBS (invoices based) clocked in at US$957mn – about c.US$450mn less than that reported by the SBP (based on cash receipts). The former depicts a better picture of the extent of damage to Pakistan’s exports. Two, remittances are also at an unprecedented risk. In March and April, they were steady because of Ramadan and the Eid festival falling in May. However, the two largest contributors of remittances to Pakistan (Saudi Arabia and UAE; c.50% share) have been severely impacted by sharply lower oil prices and tourism (Dubai Expo 2020 is postponed and Hajj proceedings remain uncertain). Meanwhile, Europe and US have been the epicenter of the outbreak since March.