The current account posted a deficit of 0.8 percent of GDP ($2.3bn) in FY15 as compared to 1.3 percent of GDP ($3.1bn) in the previous year - adjusting for $1.5 billion CSF reimbursement; the CAD soared to 1.4 percent of GDP. This simply falsifies the theory that improvement in current account is due to depressed oil prices - trade deficit on goods increased by 3 percent or $449 million in FY15.
No denying that oil imports fell significantly but that was more than offset by increase in non-oil imports and fall in exports - the bottom line is worsening trade deficit. Up until May, in 11MFY15 the import bill adjusting for petroleum group and palm oil is up by 9 percent year-on-year. On the flip, petroleum group imports fell by 18 percent or $2.4 billion in the same period. The fall is higher in crude oil imports (22%) while the finished petroleum products were down by 15 percent.
This implies that the refineries are not working on full capacity. Again, "Cash flow constraints with local refineries - attributed to the re-emergence of circular debt, did not allow them to maintain the last years growth momentum," lamented SBPs recently released third quarter report on the state of the economy. The LSM data showed that petroleum refining production grew by 2.5 percent in Jul-Mar FY15 as compared to 9.5 percent in the same period last year.
Higher demand for petrol and diesel also attributed to less fall in petroleum products imports - petrol prices have fallen substantially while the CNG prices almost remain unchanged which has thinned the gap. The unavailability of CNG for most part of the period also played its part.
In case of non-oil imports, SBPs report suggests that record high steel import is the main highlight - the metal group imports are up by 22 percent to $3 billion in Jul-May FY15. The SBP termed this a healthy sign as the higher construction activities both in public and private sector explain higher steel demand - LSM data support that argument as construction sector grew by 7 percent in FY15 after growing at 7.2 percent in the previous year.
According to the central bank, apart from metals; machinery, auto parts and other raw material imports explain the rise in non-oil imports. "Being a leading indicator of economic activity, these imports reflect a healthy growth in construction and transport sectors", stated SBP. Analysts fear that machinery imports have not really picked up yet, with improved sentiments and enhanced demand, the machinery imports will grow even at a faster pace in FY16 and 17. Do our exports have the potential to buffer it?
"Reduction in exports was a concern", simply put the SBP. In FY15, exports of goods are down by 4 percent and the central bank attributed this indirectly to the slowdown in Euro Zone. Although, Pakistan's direct export to Euro Zone is improving, the fall in China's textile finished products exports to EU has adversely impacted low value added exports to China. Similarly, slowdown in Bangladesh exports to US is negatively impacting Pakistan's cotton and cotton yarn exports to Bangladesh.
The situation is not likely to improve in FY16. The only silver lining is continued robust growth in home remittances which have gone up by 17 percent or $2.6 billion in FY15 to reach record high level of $18.5 billion in FY15. The trade deficit on goods is $17 billion in FY15 and home remittances are fully covering it. But how long will this growth sustain is a million dollar question.
The problem begins in the capital and financial account as current account deficit is within one percent of GDP and it will hover around similar levels in FY16 and probably in FY17 as well. The drying FDI and increased reliance on external debt financing is a threat to the sustainability of growing foreign exchange reserves. According to the SBP, the debt repayment will start increasing in FY17 and beyond that time, the inflows from non-debt capital flows will also dry.
"Pakistan is not likely to face any serious BoP concern in the near future. However, what is important to realize is that the longer the government takes to fix the supply-side constraints, more difficult it would become to narrow the future FX gap - the burden of external debt servicing is increasing in the interim period", warned SBP.
The concern is that if Pakistan is not able to let the exports grow and/or attract substantial FDI, another crisis is in offing any time after 2018!
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