After a momentary surplus was seen in March FY12, the current account balance went back to the deficits in April this year. With the 10-month tally for the current account deficit registering a worrying $3.4 billion in FY12 - it was a surplus of about $0.5 billion in the same period of last year - much of the distress in the external account persists. The deteriorating situation of the trade balance stands out starkly for July-April FY12. On a year-on-year basis, while the growth in exports has been nearly flat at hardly 0.1 percent, imports have continued their northward trend with a 15 percent rise. And this trend of shrinking exports and widening imports may continue for remaining two months of this fiscal year. Growing oil imports this year, particularly the increase in oil prices, accounts for the jump in imports and the consequent worsening of the trade balance. International Brent oil prices rose about 23 percent on average during 10MFY12 relative to the same period of last year. Exports, meanwhile, continued to disappoint. Declining prices of raw cotton, which have started affecting prices of value-added textile products too, after a lag this year, explain the sorry state of exports. At the same time, volumes of value-added textile products exported have also been in the lows this fiscal year relative to the previous fiscal year. Workers remittances continue to provide the thin line of support to the current account, rising by over 20 percent during July-April FY12 on a year-on-year basis. Though the off-putting scenario was also mirrored by the financial account on a year-on-year analogy, a glance at the account for April indicates signs of some breather, though meager. Contrary to the trend of outflows from the financial account seen in the last few months, April saw a surprising inflow of $400 million, which helped beef up the financial account for 10MFY12 to $1.2 billion. Delving into the details of this financial account surge reveals that FDI inflows have been kind on April relative to March and February this year. A Board of Investment official claims that the month-on-month increase is more a cyclical phenomenon observed after the end of a quarter rather than any significant change. But it was inflows in portfolio investments that have been particularly bright in April this year. Portfolio investment inflows during FY12 have been quite poor, with outflows recorded in most months of the fiscal year, and April was a pleasant exception. Foreign inflows in May continue to be buoyant as well, being already greater than what was recorded for April, and will likely reflect positively on portfolio investments for Mays financial account. The buoyancy in the stock market owing to some regulatory easing on CGT, coming back of a big player and the new ordinance of whitening the money through stock market investment have and may keep on enticing short-term investors. However, whether these portfolio inflows would lure in some FDI in the near to medium future is something to ponder about. Given other bleak macroeconomic and social variables, chances appear thin. If these ordinances are approved in the Finance Bill of the upcoming budget, analysts expect a further positive bearing on the local bourse. Other investment assets in the financial account also showed positive inflows in April vis-à-vis March, particularly in the anks and other sector category. A year-on-year analogy, however, still shows FDIs dwindled by about 50 percent and portfolio investments still showing an overall outflow for 10MFY12 relative to inflows during the same period of last year. As for SBPs reserves, interestingly, after decreasing every month relative to the previous one, SBPs reserves increased - though marginally - by over $100 million in April. "The increase in (SBPs) reserves is due to small multilateral and other inflows," Syed Wasimuddin, chief spokesman of the SBP, was quoted in these papers a few weeks back with respect to the surge in reserves in April. However, relative to July-April FY11, 10MFY12s reserves were down $2.3 billion, showing no respite for this critical component of the external account. Repayments to the IMF will be causing further strain on the reserves as about another $400 million and $110 million will be due in May and June this fiscal year, respectively. The rupee-dollar-exchange rate will likely bear the brunt of this strain on reserves in the days to come. Going forward, while exports and shrinking reserves continue to raise concerns about the health of the balance of payments, receding global oil prices and expectations of a continuation of this decline for a few months down the road lend some ray of hope. There are also hopes of a restoration of CSF payments, thanks to softening relations Pak-US relations, which might help support the current account to some extent.
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