After three months of under $1 billion monthly deficit (Jan-Mar monthly CAD avg: $674 mn), the current account deficit slipped again to $1.2 billion in April. On yearly basis, it is still down by 45 percent. The CAD in Jul-Apr stood at $11.6 billion, down by 27 percent. Things are going in the right direction, but slowdown is not perfectly aligned with economic difficulties Pakistan is facing to tone down the deficit. There is a lag.
The import bill stood at $4.2 billion in April, up by 1 percent on monthly basis, but down by 15 percent on yearly basis. In coming months, imports would be under pressure as energy consumption usually peaks in summer. Unlike ‘winters’ in the Game of Thrones, ‘summer’ is tough for Pakistan’s current account. Summer is coming with higher oil prices. It will be hard to keep imports down without load management.
The other element to note is that decline in import bill is not fully reflected in current account numbers. There used to be the case of under invoicing of numerous products (mainly non-essential), and now under FATF scrutiny, that phenomenon is getting difficult. With close to full reporting of imports, the import bill is not fully reflecting the decline.
The counter argument is that if under invoicing is curbed, the remittances should have increased by same proportion. The mechanism is that the amount of imports under invoiced used to be netted against the incoming remittances via hundi hawla system. Since imports are not netting off, official remittances should have increased.
However, reported remittances grew by 2 percent only in April and in 10MFY19, the growth is at 8 percent. The higher growth was in the first few months of Naya Pakistan when the expat exuberance on mantra of change jacked up flows. Later, poor performance washed the gains. The other element of lower growth is that people are waiting for currency to depreciate and settle before sending money home.
Hence, the under invoiced imports might be reflecting in the numbers, but actual remittances might be low to dilute. The theory will be tested in May and June as currency is probably settled at its equilibrium for couple of months and Eid related flows are due. On imports, recent deprecation of rupee is further eroding the purchasing power and people are rationing consumption. This will further squeeze imports, and will help curb current account deficit.
The problem is that exports are not moving up, in 10MFY19, the exports are down by 2 percent. The currency adjustment is not working. There are multiple reasons to it. One is the global slowdown in trade volume - owing to US China trade war, the other is that our exporters do not have capacity to increase import, and in case they do, it is hard to get new orders.
The low hanging fruit is import substitution. For example, cheese imports have become exuberantly expensive; it’s time to make cheese here. In shoes, majority of what is retailed used to come from China, now companies are manufacturing in Pakistan. Slowly and gradually many items that were used to be imported from China and were under invoiced too will start to be manufactured at home.
Currency adjustment is good for such industries, but high interest rate is a killer for setting up new plants and units. Government has to choose between the two tightening instruments as a combination of both will just choke the economy.
The reason for higher CAD in April is mainly the slippage in primary income deficit where outflows are higher. Similarly, import of services is higher in April too. The incremental primary income and services trade deficit (from Mar19 level) stood at $319 million and the CAD is higher by $370 million.
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