From an all-time low of Rs276.58 a US dollar on February 3, the rupee gradually rose to 259.99 on February 24 — a recovery of 6 per cent — as crippling import restrictions remained in place. But it may come under renewed pressure in the April-June quarter. The external sector fundamentals are still too weak to lend lasting support to the local currency.

The massive decline in the current account deficit from $2.467 billion in January 2022 to just $242 million in January 2023 must be seen in its correct perspective.

In January 2023, Pakistan’s goods’ imports bill tanked to just $3.924bn due to massive restrictions, from $6.203bn in January 2022. In January 2022, the State Bank of Pakistan (SBP) had about $16.608bn in forex reserves, but in January 2022, it had less than 19pc of that — $3.11bn.

This reduction in goods’ imports has made all the difference in the current account deficit. Hasn’t it?

Forex-starved Pakistan had to curb imports right from the beginning of this fiscal year in July 2022. That reduced goods’ imports between July 2022-January 2023 to $33.452bn from $42.298bn in July 2021-January 2023, according to the SBP’s latest balance of payments data.

During the seven months of FY23, the current account deficit shrank because imports plunged and not because exports or remittances grew

This massive decline in imports bill brought down the current account deficit to $3.799bn in the first seven months of this fiscal year from $11.558bn in the same period of the last year.

Most tariff restrictions on imports (higher import duties and additional levies) are expected to be imposed from April 1. That’s what Pakistan has told the International Monetary Fund (IMF) during its recent talks. However, once these restrictions are lifted and letters of credit are opened relatively easily, imports will rise — though still slower than normal because of the macroeconomic conditions.

This means imports in April-June this year will be larger than in the past three-quarters of FY23. That may bring the rupee under renewed pressure.

The possible loss in the rupee value will depend on how fast Pakistan gets the promised forex support from friendly countries after unlocking the last tranche of $1.1bn of a stalled $6.5bn IMF loan in March. It will also depend on how exports and remittances behave during April-June.

But one thing is clear: the SBP will not be able to cap the exchange rates again. (After keeping the exchange rates range-bound for months, the central bank finally lifted the cap on January 26). Pakistan has assured the IMF of not capping the exchange rates again and it will have to remain true to its word to be able to request a new, larger bailout programme in the next fiscal year starting July 2023.

A new, larger bailout has become necessary to continue to service old external debts. Avoiding another IMF loan does not seem an option now because friendly countries like Saudi Arabia and China have started attaching strings to forex funds they once provided “unconditionally”.

The current account of Pakistan’s balance of payments primarily covers our imports and exports of goods and services and remittances sent back home by overseas Pakistanis. Two other items — primary and secondary income (other than remittances that themselves are secondary income) are also part of the current account.

During the seven months of FY23, the current account deficit shrank because imports plunged and not because exports or remittances grew. In fact, exports of goods went down to $16.429bn from $17.742bn in the same period last year. And remittances also declined to about $16bn from $17.988bn.

While imports will rise, there is little chance of exports and remittances growing substantially amidst a global economic slowdown and lesser job opportunities for Pakistanis in the Gulf Cooperation Council region — the main centre of Pakistani diaspora.

The government and the State Bank of Pakistan are trying to contain the current account deficit to under $10bn at the end of this fiscal year in June, down from $17.4bn in the last year. From $3.799bn in seven months to even $9bn at the end of the 12th month in June means Pakistan is set to witness a $5bn additional current account deficit in the next five months — between February and June. With that prospect in sight, no one can expect the rupee to remain stable during the April-June quarter.

The government and the SBP should continue the ongoing crackdown against capital flight, smuggling and hoarding of dollars and illegal forex trading. They also must ensure that export proceeds of IT and IT-enabled services come via banking channels. Commercial banks must continue to implement SBP’s recently amended exchange rules designed to punish goods’ exporters for delayed selling of export dollars in the interbank market.

Published in Dawn, The Business and Finance Weekly, February 27th, 2023