Oil helps current account

The current account deficit recorded at $610 million in January as against $438 million in December (monthly average of $238 million in Jul -Dec). In Jul-Jan the deficit stood at $2.0 billion (1.2% of GDP) versus $2.6 billion (1.7% of GDP) in the corresponding period last year. On monthly basis, higher deficit is contributed to the absence of CSF money and low growth in home remittances, although the trade deficit kept on shrinking.

In Oct-Dec quarter, the CAD ($1,074mn) was 3 times of what it was in the first quarter ($351mn); but barring CSF flows ($713mn) in the first quarter (nil in second quarter), the deficit thinned to $202 million. No CSF flow in January partially explained higher deficit.

The trade balance of goods in January was 13 percent lower than that of December to stand at $1.56 billion and is almost at par of average monthly deficit in the first half. The good omen is that imports kept on heading south thanks to oil price which probably touched its trough during January - imports stood at $3.26 billion in January as against $3.73 billion in December while monthly average was $3.34 billion in Jul-Dec.

The imports bill may have bottomed out or close to its lowest ebb as oil prices have already started recovering and the rumours of Russia and KSA reaching an agreement on oil production limits are building and oil prices are likely to recover in coming months.

Overall imports of Pakistan fell by 7 percent in Jul-Jan FY16 after a decline of 1 percent in FY15 and petroleum group solely contributes to this fall. This is evident from the fact that imports barring oil increased by 8 percent in FY15 and by 9 percent in first seven months of this fiscal year. The increase is more prominent in machinery imports which is exhibiting that a few industries including power and construction are in expansionary phase - after remaining subdued for many years machinery exports starting picking up in FY14. It increased by 26 percent in FY14, 11 percent in FY15 and 14 percent in Jul-JanFY16. Without translating these expansions into export surplus, the pickup in machinery exports are a cause of concern for balance of payment.

The contribution of oil in imports was 35 percent in FY14 which reduced to 29 percent in FY15 and in Jul-Jan FY16 it was mere 21 percent. Thus, any reversal in oil prices will simply wash out all the benefit accrued in the form of low imports bill and will expose the up tick in other imports which could have been tamed by currency depreciation.

The worrisome fact is that there is no respite to falling exports which fell by 13 percent to reach $1.7 billion in January. Slowdown in China and depressed commodity prices partially explain the plummeted exports proceeds, rest can be explained by lethargic efforts of exporting sector to wither hard times while overvalued currency is further dampening the exporting potential. In Jun-Jan the exports fell by 11.3 percent (YoY) to stand at$12.5 billion.

Mind you exports were already falling as in FY15 it declined to 8.9 percent of GDP from 10.3 percent of GDP in FY14 and in Jul-Jan FY16 the proceeds slimmed to 7.3 percent of GDP. This is an alarming trend and it should jolt the policymakers to provide right incentives including correction in currency to support declining exports. It is pertinent to note that the fall in non textile exports is higher as textile to total exports ratio increased from 54 percent in FY14 to 60 percent in Jul-Jan FY16. Alas, no diversification is on cards.

Nonetheless, the balance of trade in goods marginally reduced by 1 percent to $10.8 billion and the fall bettered to 5 percent after including services trade to $12.1 billion, thanks to $713 million of CSF in the first quarter.

Home remittances almost filled the gap as the toll was $11.2 billion in Jul-Jan. However, the growth of remittances has considerably slowed down as it increased by mere 6 percent in Jul-Jan as against the CAGR of 16 percent in FY10-15. With every passing month amid falling oil prices, the remittances slowdown is getting pronounced as it fell by 10 percent in January as compared to December. In the second quarter (Oct-Dec) remittances were 4 percent lower than that in the first quarter (Jul-Oct).

In case of financial accounts, January wasn't a good month as virtually it hung in balance versus an inflow of $1.3 billion ($500mn by WB and $400mn by ADB) in December. Thus, there were not any financial inflows to compensate $610 million CAD in January and overall balance of payment situation worsened by $415 million in January. SBP liquid reserves fell to $15.4 billion (overall reserves $20.3bn) by Jan end from its peak of $15.9 billion (overall reserves $20.8bn) in December. The reserves inched up to $20.4 billion as on 12th Feb 2016.