The current account deficit forecast was cut by $2 billion

Islamabad:

Pakistan has told the International Monetary Fund (IMF) that its current account deficit may remain below $4.5 billion due to lower-than-projected imports – a claim, if accepted, that could significantly ease its external financing woes of Islamabad for this financial year.

Despite the reduction in imports and other austerity measures, Pakistani authorities have informed the IMF that they would be able to achieve economic growth of 3% to 3.5%, sources told The Express Tribune. Inflation will remain around the official target of 21%, they added.

The exchanges were made as part of ongoing talks under the first revision of the $3 billion standby agreement.

The Finance Ministry informed the lender that based on first-quarter results and squeezed imports, the current account deficit may remain in the range of $4 billion to $4.5 billion in the current fiscal year. It was just $927 million in the July-September quarter.

At the time of the budget announcement, the government had projected a deficit of $6.5 billion, which was in line with the IMF’s July estimate. A cut of at least $2 billion will significantly reduce the external financing gap, provided the IMF also approves the new assessment.

It is not clear whether the State Bank of Pakistan also cut its current account deficit projections.

The expected $2 billion reduction in the current account deficit is more than the $1.5 billion the government is struggling to raise through Eurobonds. Pakistan has told the IMF that it is facing difficulties in arranging about $6.5 billion in external financing during the current financial year.

The sources said the assessment was based on the assumption that the country would meet this year’s export target of $30 billion. In the first four months (July-October), exports amounted to just $9.6 billion, up 0.7%.

The catch was imports, which the Treasury Department forecast at more than $54 billion for the current fiscal year, down from last year’s level. The new forecast is $10.4 billion less than the amount the IMF used in its July report.

Imports in the first quarter totaled $17 billion, down 18.5% from last year. Sources said the government also expected remittances to top $30 billion in the current fiscal year, although in the first three months, inflows shrank by a fifth.

Reading Current account again in deficit

While the reduction in imports will reduce the external borrowing requirement, it will reduce the tax revenue of the Federal Board of Revenue (FBR) projected on the basis of imports of more than $60 billion.

External financing and high debt servicing costs remain the two weakest areas in the ongoing Pakistan-IMF talks on the second tranche of the $710 million loan.

The government told the IMF that economic growth could remain in the 3% to 3.5% range, an estimate that was better than forecasts by the central bank and the IMF.

The ministry sees economic growth rising to 5.5% in the medium term, but challenges remain.

During the last financial year, the economy grew by 0.3%, an official claim that neither the IMF nor the World Bank has so far accepted. The IMF was told the government was set to revise up last year’s provisional 0.3% economic growth rate by the end of November, which would also coincide with the release of first-quarter economic growth data.

The economy is expected to get a boost from improved crop production, mainly rice and cotton. Achieving the 3.5% growth target depends on a stable external and internal environment.

Pakistan’s fiscal position remained better in the first three months of the current fiscal year, but was still vulnerable due to rising debt servicing costs. Sources said inflationary pressures still remain high, although the authorities hope to meet the annual target of 21%.

They said the IMF has been informed that due to better supplies, a stronger rupee in the first quarter and subsequent deflationary actions in markets, the inflation rate will remain in the 20% to 22% range.

The central bank’s assessment was also in line with new finance ministry data. The IMF in July forecast inflation at 25.9% for the current fiscal year.

In the first four months, inflation slowed to 28.6%, which the finance ministry said would slow further in the second half.

For the next financial year, the ministry has forecast inflation of 7% to 8%.

Sources said the IMF will share its assessment of gross domestic product (GDP) growth, the current account deficit and inflation in the coming days.

Published in The Express Tribune, November 7^u2023.

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