The current account deficit (CAD) is starting to drift again. In April and May 2019, CAD’s monthly average crossed the billion dollar mark. This will challenge macroeconomic stability, despite some gains earlier this fiscal. Standing at $12.7 billion (4.8% of GDP) in 11MFY19, CAD is down by 29 percent from $17.9 billion (6.2% of GDP) in the same period last year. More improvement is required in CAD, necessitating further monetary tightening.
After improving to $675 million monthly average in 3QFY19, CAD has slipped to $1.2 billion, on average, in the April-May period. This has happened despite continued adjustments in interest rates and exchange rates. Yes, the impact of tightening may come with a lag. But the tightening spells had started 18 months back and the deficit had started tapering off since 1QFY19, with 3QFY19 turning out to be the best quarter. Now the numbers are becoming scary again.
The granular data analysis is not showing as depressing a picture as the headline numbers portray. The problem is that imports are not coming down to the policymakers’ liking while exports are not changing in value terms. The only silver lining is the decent growth in home remittances.
In the case of imports, the Brent oil prices moved up in Apr-May, averaging $70.5 per barrel, higher than the $63.3 per barrel average seen in 3QFY19. This could partially explain why imports are not coming down. The detailed trade data for May are yet to be released, but the April numbers are suggesting that oil and some other goods’ imports (whose prices are linked to oil) were on the rise again. The non-oil imports are down by 12 percent year-on-year in 10MFY19 – but there is room for further decline.
The headache is mainly coming from the exports’ side, where, in 11MFY19, the figure is down by 2 percent year-on-year. On the face of it, the currency adjustment is not having any benefit on the exports, but some of the improvement is washed away by the decline in process of cotton and its value-added products. The cotton index this year (11M average) is down by 10 percent, and that is resulting in falling exports despite increase in quantity exported. For example, the readymade garments exports’ volume is up by 29 percent year-on-year in 10MFY19 while in dollar terms the increase is mere 3 percent.
Thus, the oil prices and cotton prices both went against Pakistan’s desires. And that has resulted in goods’ trade deficit to not fall much – down by 9 percent year-on-year in 11MFY19. One theory of lower non-oil imports fall is that the impact is coming from decline in under-invoicing practices, along with increased crackdown on money laundering. If that is the case, the fall in under-invoiced imports is reflecting in growth of remittances.
Usually, under-invoiced import payments are netted off against home remittances through Hundi and Hawala practices. Now if the import payment is made through legal channels, the equivalent remittances are now being routed via the legal, banking channels, instead of informal channels. The overall recorded remittances grew by 10 percent year-on-year in 11FY19. In fact, last month was the best – with 30 percent growth month-on-month and 28 percent growth year-on-year, apparently due to the Eid-related inflows.
The real reason for slippage in current account deficit in the last two months is increase in services’ imports and higher secondary income debit. The import services growth (monthly average grew by 51% in Apr-May versus 3QFY19 monthly average or increase of $346mn per month) could be seasonal, as travelling is usually high in summer/Eid holidays and many individuals performed Umrah during Ramazan. This account may slowly improve. In the case of secondary income debit, higher foreign debt servicing could continue due to accumulation of debt.
The mixed macroeconomic scorecard for FY19 – characterized by solid gains scored earlier in the fiscal, but now at risk of being undermined by creeping deterioration in external account – is going to test the monetary wisdom of the new economic team led by Dr. Hafeez Sheikh. There is a limit to how much tightening can be done. And there is no certainty that more tightening will make exports growing again.
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