RECORDER REPORT

KARACHI: The country has posted its fourth consecutive monthly current account (C/A) surplus of $382 million for October 2020, taking the first four months of FY21 surplus to $1,160 million.

Analysts said that the persistent surplus owes mainly to an outsized jump in monthly remittances which have averaged over $2.3 billion between June-October 2020 period as compared to $1.8 billion during the first 11 months of FY20 period. During October 2020, remittances were close to September 2020 levels of $2,284 million and depicted an improvement of 14.1 percent on year-on-year basis.

In addition to remittances, consistently narrowing merchandize trade deficit ($1,497 million in October 2020) has substantially helped sustain surplus during the four months of FY21 period. Weaker imports due to depressed oil prices (Arab Light average $40.9/bbl in October 2020 as compared to $42.2/bbl in September 2020) and resurgence in exports catalyzed these improvements in the trade balance, Faizan Ahmed, Head of Research at BMA Capital said.

Financial account flows on the other hand, have remained rather unimpressive during this period with Foreign Direct Investment (FDI) improving by just 9.1 percent on YoY to $685 million during the four months of FY21, he said adding that October 2020 fared better in terms of FDI inflows with the month recording an inflow of $317 million but this was substantially offset by large outflows in Foreign Portfolio Investors (FPI) segment of $281 million.

Overall Balance of Payment (BOP) during October 2020 showed a net outflow of $45 million, taking four months of FY21 outflow to $220 million. Further deterioration in BoP is possible during November 2020 as well given the four-month advance repayment of Saudi Arabia’s loan, Faizan Ahmed said. However, better performance in the C/A and inflows from IMF, China or global bond issuances could potentially offset these outflows in the near-term, keeping FX reserves afloat, he added.

“Assuming oil prices stay near $40/bbl level and monthly remittances stay close to $2.2 billion, our base case estimates show Pakistan’s C/A deficit for full year FY21 to stay between $2.5-3.0 billion (0.9 percent-1.1 percent of GDP) as compared to $2.9 billion in FY20”, he said. Higher than expected food and revival in machinery imports could lead to a revision in our estimates for full year FY21, he said. “In a bear case, we expect C/A deficit to range between 1.1-2.0 percent of GDP,” he added.

He said over the past few years, China has remained the major investor in the country as the Western economies, especially the United States (US), has shied away from the country. President Donald Trump’s greater focus on the domestic economy and a tit-for-tat trade war with China had also shifted the focus away from EM countries, among other reasons. “We believe that the election of Joe Biden can potentially bring countries, such as Pakistan in the spotlight again,” he said.

“With a stable PKR, improving FX buffers, and improving growth prospects; we believe CY21 might prove to be an eventful one for Pakistan,” he said. Nonetheless, risks to the outset persist and a lot will depend on the authorities’ commitment and resolve to steer the country out of a potential second wave of COVID-19 cases and political upheaval, he said adding that urgent focus on policy reforms, deregulation and a change in mindset is required to prepare the country for a change in global leadership.