The current account is back in the red with relaxation on imports, a condition of the SBA with IMF. The deficit stood at $809 million in July 2023 which is higher than the cumulative surplus of the preceding 3 months. It is a combination of higher imports and lower remittances that has resulted in a deficit, while imports are not at an alarming level – standing at $4.2 billion, which is much lower than the average monthly imports of $6.0 billion in FY22.
The secular fall in exports and remittances along with higher external financing need is making $4 billion imports too much to handle. Goods exports stood at $2.1 billion and remittances were $2.0 billion – while the combined number is not enough to cover $4.2 billion of goods imports. The economic capacity has shrunk, which is causing income levels to squeeze and unemployment to grow.
Imports (SBP payment data) at $4.2 billion in July 2023 were 13 percent higher than the previous six months average of $3.7 billion. And it is not the rising oil prices or peaking summer energy load that is pushing the imports up. In fact, petroleum imports are down by 43 percent to $708 million from the average for the last six months.
The explanation for lower petroleum imports points towards the growing smuggling of diesel from Iran; almost zero reliance on imported furnace oil in power production; and relatively larger cargos landing in June 2023. It is expected that the petroleum imports shall be higher (around $1.5 bn) in August due to growing prices and current demand (which, however, is much lower than what it was in FY22).
Then food imports are almost at a normal level – at $632 million – 4 percent higher than the previous six months’ average. The increase is due to pickup in so called non-essential imports – import barring food and petroleum, are up by 53 percent from the previous six months average of $2.9 billion.
There was a difference of $1.3 billion in non-oil and non-food imports during Jan-Jun 2023 in PBS data ($12.5 bn) and SBP ($11.2bn). And in July, SBP imports toll in non-food and non-oil is $591 million higher than that of PBS. This amount reflects past imports payments which were previously deferred during Jan-Jun 2023.
Interestingly, import via non-banks is at $645 million during July 2023, which is almost 3 times of the average monthly number for the preceding six months. These are contractual imports – either from parent or sister firm (for example CKD imports of Pak Suzuki) or payment of imports which were made by using SBP’s deferred facility.
Then there is an uptick in imports for machinery, automobile, chemicals, metals and other imports, as now there are some relaxations in the import restrictive regime. However, SBP is still asking banks to manage the demand and supply of dollars by themselves. And these non-oil and non-food imports shall remain relatively high in the coming months. The overall toll shall grow if petroleum imports pick up to recent past levels.
The key is allow some pick in exports - which are down by 8 percent from the previous six months’ average. With imports restrictions to be lifted there would be some improvement in overall supply chain and that shall help in export growth. Then the demand factor from the Western destinations is slightly improving and that may help exports return to its FY22 levels of $2.5 billion monthly exports. However, the rise in imports may be even higher.
In the case of services, imports are moving up due to higher good imports, as freight and other services charges increase proportionately. On the other hand, services exports are slight tapering off, as this could be due to small and medium size service exporters increasingly retaining partial payments outside of Pakistan.
The worry is falling remittances -down to $2.0 billion – decline of 7 percent MoM and 19 percent YoY. The currency depreciation is not helping, as senders are slowing down in pace to benefit from falling Pak Rupee. Then, the informal imports is eating up formal remittances, as smuggling payment is to be paid from informal remittances through hundi hawala system. Let’s see how much remittances improve with relaxation in imports restriction, as without better remittances, it would be costly (in terms of currency depreciation and high interest rates) to bring the current account deficit under control.
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