The current account deficit tamed to $1.2 billion In February; down 25 percent month-on-month. The Jul-Feb number stood at $10.8 billion, up 50 percent year-on-year. In terms of GDP, the CAD for Jul-Feb stood at 4.8 percent - completely aligned with IMF’s full year projection.
The question is whether the decline is attributed to currency depreciation round one in December or it is a one off adjustment as January deficit was a little too high. The decline in CAD in February is primarily attributed to slowdown in imports while exports virtually stagnated around January numbers. The imports on monthly basis were down by 12 percent to $4.3 billion in February, while for eight months, the import toll is up by 17 percent to $35.7 billion.
The fall in imports is broad based with major decline coming from food group (primarily palm oil), Machinery group (mainly electrical machinery), transport group (Mainly CBU) and a few other groups. In a nutshell, barring petroleum group every other commodity group imports plummeted. The decline across the board suggests that currency weakening is showing its impact on imports.
However, it is too early to form an opinion based on one month data. From April onwards the impact of second round of depreciation may start coming into play. But the risk to downward adjustment is likely high petroleum imports in summer as power consumption seasonal increase may partially nullify the benefits of currency erosion.
The catch is in exports where some positive surprises are coming soon. One is the obvious impact of currency depreciation, and others are based on subsidies extended to manufacturing sectors, one offs, and opportunities in food exports.
The government has sold 2 million tons of wheat to traders for exports at massive subsidy - around $200 per ton, wheat exports will fetch roughly $400 million. However, the government sold to traders at around $135-140 per ton against $295 per ton (Rs1300 per 40 KG) support price. This sum up to Rs25-35 billion one time fiscal subsidy.
The other subsidized commodity exports is of sugar, as the export toll is sweetened by $315 million in Oct-Feb. There is now an opportunity to enhance rice exports without the subsidy element. The EU has recently banned Indian Basmati rice imports owing to higher Tricyclazole level which opens conduit for Pakistan to capture $260 million Indian basmati rice export market to the EU.
Thus, the food items will help boost exports in remaining months of this fiscal year, and in the shape of Indian Basmati market export a sustainable avenue is in offing. To date, food exports are up by 25 percent YoY in Jul-Feb at $2.8 billion. Over 50 percent of increase is attributed to one off sugar exports and wheat will replace sugar for the momentum to continue in rest of the fiscal year.
In case of textile and other manufacturers, 8 percent and 17 percent respective growth in eight months may continue due to subsidy element; and the growth may increase in months to come due to currency depreciation.
That said, trade gap is still too high and will remain a cause of concern in medium to long term. The trade deficit of goods stood at $19.7 billion, up by 22 percent year on year. The remittances which used to virtually fully cover the trade deficit a couple of years ago, managed to finance only 65 percent of trade deficit in Jul-Feb18.
The remittances grew by only 3 percent in Jul-Feb while on monthly basis it fell by 12 percent in February. And the depreciation may not help remittances to revive as the number of Pakistani workers going to Saudi Arabia has shown a significant decline. (Read: Remittances’ Saudi blow, published on March 13, 2018).
The next step is to finance the current account deficit; where the problem lies. The FDI at best may fill one fifth of the CAD in FY18 and rest has to come in the form of soft and commercial loans. The story of economic growth is hinged upon external balance and that is dependent upon materialization of debt. The economy may keep on growing as long as the debt is coming to finance the saving investment gap.
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