IGI Securities Limited - Day Break (21 Aug 2023)

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IGI Securities Limited – Day Break (21 Aug 2023)

August 21, 2023

Karachi, August 21, 2023 (PPI-OT): Jul-23: C/a Deficit of US$ 0.8bn Comes After Import Control Relaxation

For the month of Jul-23, C/a balance registered a deficit of US$ 0.8bn compared to a deficit of US$ 1.3bn recorded during the month of Jul-22, a decrease of 36%y/y.

Additionally, the International Monetary Fund (IMF) stressed the importance of allowing the Pakistani Rupee (PKR) to fluctuate based on true demand and supply mechanisms.

We review current account balance numbers published for the month of Jul-23 by the State Bank of Pakistan (SBP).

Monthly current account deficit printed US$0.8bn as imports jump

For the month of Jul-23, C/a balance registered a deficit of US$ 0.8bn compared to a deficit of US$ 1.3bn recorded during the month of Jul-22, a decrease of 36%y/y. This deficit comes after four consecutive months of surpluses that summed to US$ 1.6bn.

Overall, exports remained muted; textile group jumped

For the month, the country’s export receipts recorded at US$ 2.1bn compared to last month of US$ 2.1bn, with no change on a m/m basis, and on a yearly basis down by 5%y/y. Jul-23 monthly export number is significantly below 12MFY23 monthly average export of US$ 2.3bn. During the month, the textile group recorded a surge of 8%, while the rest declined

On the other hand, Imports surged as import control relaxed

During the month of Jul-23, the country’s import bill recorded US$ 4.2bn up 33%m/m and down 24%y/y. During the month, all groups posted a sudden jump except for the petroleum group which recorded a decline of 25%m/m.

Remittances declined by 7%m/m

During the month of Jul-23, remittances posted US$ 2bn compared to the previous month of US$ 2.2bn, a decline of 7%m/m. Major inflows came from Saudi Arabia and UAE, US$ 0.48bn and US$ 0.32bn respectively.

Outlook

The recent increase in the current account deficit is a result of the State Bank of Pakistan repealing the import control policy in June 2023. This decision was made to pave the way for a Standby Arrangement by the lender of last resort to support the balance of payment crisis. Additionally, the International Monetary Fund (IMF) stressed the importance of allowing the Pakistani Rupee (PKR) to fluctuate based on true demand and supply mechanisms.

Prior to this policy change, the current account balance was curtailed through import control measures that lasted for 11 months since August 2022. During this time, Pakistan faced shortages of dollars due to debt servicing and a decline in exports and remittances. Overall, the repeal of the import control policy and the IMF's recommendation for PKR flexibility have contributed to the recent increase in the current account deficit.