ISLAMABAD: The measures taken by the federal government and the State Bank of Pakistan (SBP) to reduce the current account deficit (CAD) are bearing fruit, WealthPK reported.
According to an official document, implementation of several steps to improve the trade balance and reduce the current account deficit is yielding positive results. The SBP imposed 100% cash margin restrictions (CMR) on various items to discourage imports and support the balance of payments.
The central bank also revised prudential regulations for consumer financing and prohibited financing for imported vehicles.
In order to encourage import substitution, initiatives such as mobile phones’ local assembly, production of local smart televisions and new investments or production in ceramic and tiles industry have been taken.
These policy measures and reforms have attracted producers to expand their plants as well as propel foreigners to commence production in Pakistan.
Attempts have been made to boost oilseed production. Olive plantation is being promoted and production of packaged milk has been increased. Owing to better crop outlook, import of sugar, wheat and cotton will witness a massive slowdown during the second half of the current fiscal year (FY22). This will further reduce the import and in turn the current account deficit.
The Economic Coordination Committee (ECC) of the cabinet has also approved certain tariff rationalization measures, which will be implemented for six months to contain imports of vehicles, such as imposition of 10% regulatory duty (RD) on import of electric vehicles (EVs) in completely built units (CBU) condition of more than 50 KWH battery pack, excluding commercial buses and trucks; increase of regulatory duty (RD) from 15% to 50% on import of all types of hybrid vehicles in CBU condition, exceeding 1500cc but not exceeding 1800cc; and increase of RD from 15% to 50% on import of vehicles with spark/compression ignition engine (conventional engines) in CBU condition exceeding 850cc but not exceeding 1800cc, says the document.
The Ministry of Finance expects that Pakistan’s import bill will contract with stabilization in commodity prices in the international market, which will in turn reduce the current account deficit. Market-based exchange rate policy or rupee depreciation against the US dollar would discourage imports in the coming months, WealthPK reported.
Moreover, Saudi Arabia’s recently announced $1 billion deferred oil payment for Pakistan, starting from January 2022, will also reduce pressure on the import bill.
The Ministry of Finance has also said in its recent monthly economic outlook that due to expected improvement in the trade balance, the current account deficit may start declining in the coming months and the growth momentum will also continue in FY22 on the basis of favourable movement in high frequency variables.
The recent report of International Monetary Fund (IMF) on Pakistan has forecast that the current account deficit will be around 4 % of GDP in FY22. However, it added that under the World Economic Outlook (WEO) baseline, moderating commodity prices, export growth and stronger policies will help the CAD to converge toward 2.5% of the gross domestic product (GDP) over the medium term.
In this regard, continued commitment to a market-determined exchange rate and prudent macroeconomic policy mix will help ease external pressures. It would also help, together with the IMF’s recent special drawing rights (SDR) allocation and tighter monetary policy stance, strengthen the reserve cover to some 2.8 months of imports by the end of the forecast horizon, up from less than 2 months of imports at the onset of the program.
It is pertinent to mention that according to the SBP, during Jul-Dec FY22, the current account recorded a deficit of $9.1 billion (5.7% of GDP) and the trade deficit increased by 106% to $25.5 billion during the same period. Some analysts predict that the CAD will be around 5% of GDP or $16 billion, while the central bank expects it to be 4% of GDP for the current fiscal year. However, the government is fully confident about further improvement in the current account after the resumption of the IMF programme.
INP
