As expected, the current account deficit fell short of billion dollar mark per month - down by 17 percent to stand at $8.4 billion {annualized 4.9% of GDP}. The import compression is working and now onwards, year on year, decline in imports will be consistently visible – it is down by 10 percent in January. Export numbers are encouraging, up by 10 percent to $2.3 billion in January. However, the growth may taper in months to come.
It is safe to assume that CAD will remain, on average, around $800 million per month for the remaining fiscal year. The economic slowdown is resulting in declining non essential imports. By taking petroleum imports out, the number is down by 11 percent in Jan19, and based on PBS data, decline (20%] is even more encouraging. Coal imports are not counted in petroleum group, excluding coal, the import bill decline is even better.
Major dent is in machinery (mainly power generation and electrical) imports, which fell by 23 percent or $1.3 billion in Jul18-Jan19, as round of CPEC is over. The next round of machinery imports, perhaps, will come in textile (for exports), and renewable in energy.
If we take both machinery and petroleum imports out, in 7MFY19, the import decline is a mere one percent. However, that does not mean that tightening is not working. There is a case of higher imports of textile group (mainly raw cotton) and agriculture and other chemicals. These imports cannot decline without substitution.
The one element that needs to be highlighted is the change in the quality of imports - in other words, contribution to economy and employment per unit of imports has improved. The credit does not necessarily go to the PTI as some measures taken by Miftah and Abbasi are yielding results as well. For instance, within petroleum imports, the shift is from furnace oil to RLNG - cleaner and efficient fuel. In case of automobile, completely built units are replaced by completely knock down imports - more room for value addition. Similarly, import in raw cotton has increased which would be re-exported after value addition.
The policy focus should be on import substitution in edible oil by encouraging oilseeds production and extraction business, and similar steps are required in steel. However, the big headache is energy related imports and here import substitution may not take place in hydrocarbons, but bringing efficiencies in energy market - by focusing on renewable and deregulating energy markets, the energy bill per unit of GDP can be lowered.
The argument of quality also applies in exports - for instance food group exports are up by mere 3 percent in Jul-Jan; however, vegetables and fruits increase is in double digits, but it is offset by sugar exports decline.
The textile exports are yet to show any benefit of currency adjustment, but the sector has capacity constraints. BR Research channel checks confirm that major textile players are in advance stage of expansion planning in value added sectors. Garments are the best bet - the conversion of investment to employment and foreign exchange is one of the best in garments within the existing export portfolio.
The story of improvement in current account deficit is not in goods trade balance, but due to better services trade balance and higher home remittances. The movement is consistent with the experience of Egypt - being portrayed as success case by IMF for Pakistan to support further currency and monetary tightening. Services imports declined by 18 percent - at this rate, annual improvement in current account would be around $2 billion.
The other silver lining is in worker remittances, which are up by 12 percent or $1.4 billion in 7MFY19. With government’s focus on curbing money laundering, potential of remittances growth is bigger as most of the money laundered is netted against informally channeled remittances.
The bottom-line is that further currency adjustment may not work on improving goods trade balance - it requires exports capacity expansion and imports substitution. The benefits are accruing through decline in imports of services and improvement in remittances, where elements other than currency adjustment can do the trick.
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