Economic Analysis - Widening Deficit Increasingly Unsustainable - SEPT 2017

BMI View: Pakistan's trade accounts are looking increasingly precarious, with the deficit currently at around 10% of GDP despite low oil prices. While we believe that continued financial account inflows, together with high remittances, will be sufficient to fund the trade deficit in the near term, risks are rising from the increasing level of external indebtedness.

Pakistan's trade account continues to head further into deficit in spite of low oil prices as financial account inflows from both official and private sector channels allow the country to ramp up imports. Relative to GDP, the current trade deficit equates to around 10% on an annualised basis, while after taking into account remittances the figure falls considerably to around 3.0%. However, even then, the deficit is still at its widest point since the oil price surge of 2008, which could be problematic in the event that oil prices recover.

The following chart shows where Pakistan's trade balance would be if oil prices had remained at around USD100/bbl, assuming all other factors are left unchanged. This shows the extent to which Pakistan's external accounts have benefitted from low oil prices. Of course, if oil prices were to rise back towards recent historical averages, non-oil imports would likely fall sharply. This is precisely the risk facing the Pakistani economy. A rebound in oil prices would require a further increase in external indebtedness and/or a sharp fall in non-oil imports, to the detriment of the ongoing growth upswing.

Deficit Widening Despite Rising Remittances And Falling Oil Prices
Pakistan - Trade Accounts, % of GDP

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