The current account deficit had starting growing at alarming levels since Oct16 and in Feb19 it is the lowest monthly deficit since Sep16. The SBP foreign reserves peaked at $18.9 billion in Oct16 and been downhill ever since. Is the trend changing again? Yes. But Feb19 imports at $3.5 billion- lowest since Oct16, might be a blip. Monthly imports are likely to hover around $4 billion and CAD will be averaged around $500-600 million for next few months.
Some overly critical voices are echoing that exports are not growing. It was not expected for exports to show any miracle. There is a time lag for exports to show progress, as value added textile units are operating at almost at full capacity, and many are planning to expand - it will take 12-18 months before the fruit is yielded.
The government should work on reviving numerous closed textile mills - mainly in yarn and weaving, not all closed machinery can re-operate, but infrastructure can be utilized and modernization should be done on individual basis. Finance and commerce ministries should consult banks and start working on restructuring debt of closed mill operators.
Continuing import compression policies for a few months is the order of the day, and economic slowdown will be the causality in the process. The other interesting perspective is to see the CAD versus IMF programme. The programme concluded in 2016 - 12th and final review was completed in Aug16, and in Oct16, the current account slippage amid reserve fall started.
The government right after the Fund programme started spending lavishly in the last two years before election and the results are in front of all today. The brakes have been applied on the economy for about a year now, and that has slowed down the economy, showing in CAD. Pakistan economy is like an old car, drive too fast, and the engine starts showing problems. Go slow and it results in better performance. But economic growth and employment are the casualties.
The fiscal mess is yet to be resolved and the government cannot afford to pace up the economy by having some sort of stimulus. The good thing is that the government now has bargaining power to negotiate with the IMF on currency and interest rates adjustments. The government should now focus on bringing fiscal house in order - mainly energy and FBR. Without that, benefits of lower CAD will be short lived.
Within imports, the major dent in Feb is in petroleum imports - the consumption is falling as HSD sales are down by 20 percent in 8MFY19. Machinery imports are low as well as CPEC and other power sector expansion cycle is ending. Not much room is left to further lower the imports without significantly denting the economy.
On exports, success is hinged upon capacity expansion, meanwhile some basic commodity sales may boost food exports in the short to medium term. The long term direction is right as the government has started working on growing cotton which may result in lower sugar or rice exports, going forward - but value addition of cotton is much better.
Remittances are up by 12 percent year-on-year in Jul18-Feb19, but down on monthly basis in Feb. The potential in remittances is there, as crackdown on money laundering may incentivize people to use legal channels. One of the reasons of lower imports could be reduced incidence of under invoicing.
The breathing space is here, but the austerity cycle is nowhere close to over. The government after seven months in power is realizing that energy is the core issue. Expect upward revision in energy prices and some new taxes in the upcoming budget to keep the economy suppressed.
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