SIZE AND TRENDS IN CURRENT ACCOUNT DEFICIT

Pakistan faces the current account deficit in fiscal year 2005-06 due to a higher import bill. This was a result of rise in the international oil prices and the rise in non oil imports fueled by the strong aggregate demand.

The federal governments of Pakistan and International Monetary fund (IMF) have estimated that the current account of Pakistan reaches at US $ 5.5 billion in fiscal year 2005-06 but actual deficit for July and December had expected to US $4.20. but according to the state bank of Pakistan’s annual report, the current account deficit which is US $1.33 billion is more higher as compared to the last fiscal year US $2.87 billion.

The Pakistan economy bared over six billion dollars trade deficit and as it is expected to settle around 13-14 billion dollar at the end of fiscal year 2007. As there us a projection of US $9.4 billion and US $12.12 billion trade deficit in fiscal year 2007.

The high oil prices and the continuously increase in the imports of Pakistan boosted the trade deficit of current fiscal year. The trade deficit yields the devaluation of currency.

There is 11 % loss in the value of the rupee year on year is reported. The average exports are US $598.87 million per month as against US $622.98 million per month a year ago. The value added exports items didn’t show any appreciation in the value of money or rupee. The 7% devaluation of last October didn’t change the picture because the devaluation will improve the current account only if the sum of foreign elasticity of demand for export and the home country elasticity of demand for import is greater then unity. If the sum is less then one, then the devaluation is likely to lead to a deterioration of the current account. The exports of Pakistan are less then its imports so its elasticity of demand is very low or we can say are not elastic.

In the first five months of the current financial year, July to November 2006, Pakistan suffered trade deficit of $5.405 billion showing a 17.91 percent increase compared to the trade deficit of $4.584 billion in same period of year 2005-06. Pakistan's trade deficit was $12.112 billion in last fiscal year 2005-2006, almost 10 percent of Gross Domestic Product (GDP), due to its high import bill and the rise in prices.

Economists believe that the soaring trade deficit would depreciate the Pakistani rupee against dollar and other currencies. The demand by local importers for dollars in the coming months would increase to finance their surplus imports. The rise in the trade gap has been attributed to high oil import bill, and rise in the prices of food items, machinery and automobiles.

 

(Muhammad Aamer Shahzad)

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