Current account on a slippery path

The current account deficit for January 2017, in dollar terms, is the worst since October 2008. On quarterly basis, Oct-Dec16 exhibited highest deficit since Oct-Dec08. And those who do not have short term memory loss, still remember the jolts Pakistan's economy had in 2008. Is Pakistan heading to another balance of payment crisis?

It is not all doom and gloom, as the economy is growing in dollar terms and GDP has increased by 67 percent from $170 billion in FY08 to $283 billion in FY16. Thus, in terms of GDP, the CAD in Oct-Dec 16 at 0.7 percent is the worst since Apr-June 2012. Just to put things in perspective, during Oct-Dec 2008, the deficit was 2.2 percent of GDP, one third of what it was when crisis hit in 2008.

Hence, there is no immediate threat of balance of payment crisis. However, slipping current account warrants serious attention. The foreign exchange reserves are still at a decent level of $21.8 billion. However, it fell by more than $2 billion in the last three months or so.

The policymakers do not have any magic wand and they cannot do anything but to rely on external borrowing to not let the reserves shrink in the short run. Government is desperately trying to privatize whatever it can, to arrest falling reserves trend and to also finance slipping fiscal deficit.

If wishes were horses, beggars would ride. It's a hard sell. Internally, privatization is not easy close to elections, and externally, foreigners may not buy at a time when the real effective exchange rate is showing 25 percent appreciation. The government would either continue to borrow externally, or live with falling reserves.

It may also take the Indonesian route to offer fresh amnesty schemes to lure black money back in the economy. Indonesia introduced such a scheme in July 2016, that helped fetch $10 billion. Given that our economy is almost one third of Indonesia, $2-3 billion is the potential of a serious scheme in Pakistan.

Back to the current account. Imports are bound to go up when the economy is an expansionary phase, and the oil bill has to go up when the prices are heading north. The imports in 7MFY17 are up by 9 percent, at a little over $25 billion. Petroleum group imports constitute 23 percent, much better than average of 35 percent of imports during FY12-14; but it's getting higher from its low of 21 percent in FY16.

The government is committed to reduce load shedding, and it is politically hard to curtail oil imports as PMLN would like to abide by its promise to eliminate energy shortage by 2018 elections. Thus, petroleum imports would go further up. Now there is a new head of LNG in the import bill. It was zero till FY14, and in 7MFY17 the toll is at $608 million, up by 117 percent YoY. This will increase more as new RLNG plants are coming online by 2017 end.

The second biggest import group which contributed 16 percent ($4.0 bn) of imports in 7MFY17 is machinery. Power generation and electrical machinery are up due to upcoming power projects while telecom machinery imports have declined.. Textile machinery imports are growing up lately, increased by 34 percent in 7MFY17 to $369 billion. That is encouraging as this may translate into exports eventually.

The rising consumerism is showing through growing imports in transportation, up by 42 percent to $1.4 billion in Jul-Jan17. People are buying more cars, and auto players are importing cars to test the market before they could start assembling locally to benefit from tax exemptions. The imports of buses and trucks are on the rise as connectivity remains the core of CPEC.

Exports, on the other hand, continue to cut a sorry figure. It is down by 1 percent year-on-year to stand at $12.3 billion in 7MFY17. Textile exports are down by 5 percent, while the dip in other manufacturing group is 7 percent. The newly introduced exports incentives are welcomed by exporting industries; but it is yet to be translated into numbers.

The trade deficit in 7MFY17 stood at $13.2 billion, up by 21 percent. In case of exports of services, absence of Coalition Support Fund is really hurting. Barring $713 million that Pakistan had in defence receipts from the US last year, exports services have performed better this year. The unfortunate part is that to maintain balance of payment equilibrium CSF from the US is replaced by short term borrowing from China.

The other dent comes from saturating home remittances which are down by 2 percent to $10.9 billion in Jul-Jan17. There is not much that can be done to undo the slowing down trend for host of reasons repeatedly explained in these columns.

The current account is down by $4.7 billion in Jul-Jan17 while the foreign reserves are down by a mere $694 million in the same time. The gap is of $4 billion; out of which FDI filled $1.1 billion, while portfolio investment in equity is down by $356 million, despite the fact PSX was amongst world top performing market.

There are fillers of $3.2 billion brought in to help arrest the fall in reserves. It includes $1 billion international capital market debt and various other forms of loans and aid. That is a dangerous trend, and is not sustainable.