Despite falling FDI in Pakistan, deficit narrows

The State Bank of Pakistan (SBP) Monday said that foreign investment in Pakistan fell 22 percent to $1.73 billion in the first 10 months of the 2009/10 fiscal year but country’s current account deficit in the same fiscal period narrowed to a provisional $3.060 billion.

Foreign investment in Pakistan during the same period last year was $2.21 billion in the same period last year and the current account deficit was $8.982 billion.

Analysts point out that higher current transfers and receipt of logistical support payments from the US contribute to lowering deficit.  The US embassy said this month it had released $656 million to Pakistan from its so-called coalition support fund for costs incurred last year in fighting Islamist militants, with $188 million transfered in late April 30 and $468 million in May.

The $188 million is reflected in the current account data for April and analysts said the remaining $468 million will be reflected in May’s data which should show a further narrowing of the deficit.

The trade deficit for the July to April period of the 2009/10 (July-June) fiscal year was $12.24 billion, compared with $14.22 billion in the same period last year.

Analysts said they expected the current account deficit to keep narrowing on falling international oil prices.

“We see a similar trend continuing in coming months with the recent decline in international oil prices further helping lessen pressure on the BOP (balance of payments),” Qureshi said.

Oil fell below $70 a barrel on Monday, its lowest in more than three months, extending a loss of nearly 17 percent over the past two weeks on fears over Europe’s debts, the weak euro and swollen US oil inventories.

Pakistan recorded a provisional current account deficit of $185 million in April compared with a provisional $40 million in March.

In a quarterly report on the economy released in March, the central bank lowered its forecast for the 2009/10 current account deficit to 3.2-3.8 percent of gross domestic product, from previous estimates of 3.7-4.7 percent.

An International Monetary Fund (IMF) emergency loan package of $7.6 billion agreed in November 2008 helped avert a balance of payments crisis and shore up reserves.

The IMF increased the loan to $11.3 billion in July and approved the fifth tranche of $1.13 billion on May 14.

But foreign investment in Pakistan continues to face decline. Out of total foreign investment, foreign direct investment fell 44.7 percent to $1.77 billion in the July to April period, from $3.20 billion in the year-ago period, the State Bank said.

Worsening security situation, with a Taliban insurgency in the country’s northwest, coupled with chronic power shortages, have kept risk averse investors out of the country .

There was a net outflow of $46.6 million of foreign portfolio investment in the first 10 months of this (July-June) fiscal year, compared with a net outflow of $992.6 million in the same period last year.

Authorities imposed a floor on the Karachi Stock Exchange benchmark index in August 2008 as political uncertainity and economic and security worries drained investor confidence.

The floor discouraged new investment and also led to a sharp outflow of funds, as foreign investors sold holdings in off-market trade.