Current account breather

The current account deficit stood at $3.7 billion in 1QFY19 - lowest in five quarters. The question is whether the lower deficit is due to the concentrated efforts of austerity including currency depreciation, monetary tightening and fiscal cuts. And if so, will the trend continue?

There is close linkage of fiscal and current account deficits; and historically the slippages in fiscal side lead to widening of current account deficit. There is visible decline in the fiscal deficit in the 1QFY19 which probably led to lower CAD.
The fiscal operation numbers for the quarter are yet to be published but a proxy of deficit can be used by the government borrowing from domestic banking system. The net budgetary borrowing from banking system in 1QFY19 stood at a mere Rs127 billion which is the lowest for any first quarter since 1QFY10.

There is no visible government borrowing from abroad in the last quarter; so it can be assumed that the fiscal deficit will be low in 1QFY19. The lower deficit is not wholly due to fiscal austerity measures. Part of it is attributed to economic transition in Jul-Sep. There was caretaker government in July, and the new government was in the process of making cabinet in Aug-Sep.

It is safe to assume that the fiscal deficit may be higher in coming quarters; but it may not be as high as it was in the last couple of years. Both federal and provincial governments (especially Punjab) have considerably lowered their development budgets, and are working on slashing subsidies.

The government has of late increased gas tariffs and is about to do the same with power tariffs to lower the fiscal burden. Higher energy prices and lower development spending would have a direct and indirect impact on spending by private sector, which can help lower the current account deficit.

Higher oil prices are diluting the impact of efforts. It is better to link the slowdown in economy or fiscal spending with non-oil imports. Just to give perspective; the CAD started jacking up since 2QFY17 when it crossed $3 billion a quarter. Back then, the petroleum group imports were $2.7 billion and in the last quarter, the number was $4.1 billion.

Decline in non-oil imports is significant in 1QFY19 which on quarterly basis declined by 19 percent. That is where the low government spending has a role to play. The government spending ought to be higher in subsequent quarters and that might have a toll on current account deficit.

It will be to see how the efforts of monetary tightening and exchange rates adjustment will impact the private sector spending and imports. The leading indicators are sales in automobiles, cement and diesel consumption.

In case of automobile, quarterly sales are higher than 50K per quarter ever since the CAD per quarter is higher than $3 billion. The number is still at 51k (1 percent growth yoy) in 1QFY19; but it is due to cars booked in the past few months. Now with an upward revision in prices, higher interest rates and restriction on non-filers. Sales may drop in coming quarters.

In case of cement, lower development spending has high correlation. The number may come down as well. And the diesel consumption in 1QFY19 is the lowest (since 1QFY17) in nine quarters. The timings almost coincided with the time the CAD started moving north of $3 billion.

Private sector led imports are likely to come down in quarters to come while government spending might be higher (relative to 1QFY19) to off-set the impact. The impact of fiscal austerity is visible on non-oil imports in 1QFY19 which may reverse; but the overall economic slowdown is yet to translate into numbers.

Another reason for lower current account deficit in 1QFY19 is healthy growth in remittances which are up by 13 percent YoY. The government is trying hard to boost remittances through banking channels; plus higher oil prices bode well for remittances from the GCC. That said, keeping the double digit pace in remittances is a hard task.

The silver lining could be in exports. The toll is up by mere 4 percent in 1QFY19; but recent measures could yield in higher exports for the rest of the year. The currency depreciation and government focus to provide affordable energy to the exporting sectors coupled with higher commodity prices may result in higher exports.

A conservative estimate is that the CAD will remain around $3 billion per quarter this year and the full year number may hover around$12-13 billion. This will result in reducing the deficit by one third from $18 billion in FY18 and the will help a great deal in bridging the external financing gap.