Increase in current account deficit portends mounting pressure on the balance of payment position, and unfortunately, it is just doing that amid all out efforts to keep the external account beefed up.
Current account deficit for December 2016 stood at $1.08 billion, which is the highest monthly deficit since October 2008.1HFY17 (Jul-Dec) aggregates show a sharp rise of 92.2 percent year-on-year with the current account deficit settling at $3.58 billion higher than the current account deficit of $3.26 billion in FY16 (Jul-Jun). As startling as this might be, it is no surprise that the spike in the current account deficit comes from the weakening of all its major components.
Deteriorating trade dynamics is not a new economic catastrophe; trade deficit for 1HFY17 spurred by 15.6 percent year-on-year. Exports have failed to recover, declining by 2.3 percent in the first half to $10.5 billion. The outlook is also not too sanguine; even though the new incentive package announced recently has blown some air of hope in the recovery of the sector, benefits are not likely to materialise in the short-run, leaving export still vulnerable to the artificially appreciated currency.
Imports at the same time are also increasing (6% YoY in 1HFY17) particularly due to increased machinery imports from projects under CPEC. However, the comfort provided by low oil imports has also been busted with the reversal in oil prices; climbing crude oil prices should increase the oil import bill going forward, which will add to the already rising machinery imports that is likely to continue to surge with upcoming expansions in steel, cement auto energy and infrastructure.
Remittances that have been funding the trade deficit for long have also started to taper off; for 1HFY17, the growth remained hand-hot. Slipping by over two percent in the six-month period, the decline is coming from a slowdown in all the three major remittance corridors; the GCC (due to fiscal consolidation amid declining crude oil prices); the US (partly due to low interest rates and AML/ATF laws for cross-border fund transfers); and the UK (due to pounds depreciation against the US dollar). In short, it seems that the remittances part is almost over!
Strikingly, foreign investment is as low as it could be even after a good amount of progress on CPEC. The increase of 10 percent year-on-year in FDI in 1HFY17 came from one-off transaction of Netherlands-based Friesland Campinas acquisition of EFOODs. Excluding this transaction, FDI has been on a decline. Surprisingly, FDI form China has declined too - by more than 50 percent year-on-year.
Moreover, there are no inflows from Coalition Support Fund (CSF) to jack up the current account this time as against $731 million in 1HFY16.
With receding remittances, dwindling exports, rising imports drying FDI, and no CSF money for support, the bigger picture is a drab. The government is relying heavily on external borrowing to stabalise the forex position. On top of that, inflation is rising, and the government has major payments awaiting that will further put pressure the forex reserves. All this points towards a need for a tightening of the monetary policy and adjustment of the overvalued currency.
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