Current account: Deficit continues

The current account slippage continued in March; but the pace of bleeding has somewhat receded. Exports and remittances inched up in March to cover up growth in imports. The 9MFY17 deficit at $6.1 billion (2.6% of GDP) is more than 2.5 times of last year. The IMF expects current account deficit to reach 2.9 percent of GDP in FY17; this implies that the average monthly deficit ought to be at $1 billion for the remaining three months of the fiscal year.

With exports set to be higher in the last quarter due to cash incentive on incremental exports; and remittances owing to seasonal impact, the deficit may remain around $1.5-2 billion in the last quarter and the full year deficit would be around 2.4-2.5 percent of GDP.

Exports crossed $2 billion for the first time in the fiscal year, as against average inflow of $1.75 billion in the first eight months. Does this mean that cash incentive scheme is working? Not really, it’s more of a seasonal impact as March was the only month of $2 billion last year, as proceeds for Christmas orders usually realize in March. Overall exports in 9MFY17 fell by one percent. The need is to wait for the last quarter to see any impact of cash incentives offered in January.

The fall in exports is broad-based as food exports fell by 7 percent in Jul-Mar while the other manufacturing group is down by 6 percent. The decline in textile is rather modest at 3 percent and within it, low value added sector, whose export market is China kept on falling, (cotton yarn: 16%, cotton cloth: 7%) while high value-added sectors’ exports to the West are on rise (Bedwear: 2%, readymade garments: 7%).

Imports are picking up at an even higher pace, $4.3 billion in March, which is the highest monthly number ever. It’s up by 14 percent to reach $33.9 billion in Jul-Mar17. Food group imports increased by one fifth to reach $4 billion, while transport imports are up by two fifth at $1.9 billion.

Amongst heavyweights; petroleum group is up by one fifth to $7.8 billion – There is a new elephant in the making - RLNG imports reached $843 million; they were nil in FY14. This is bound to grow more as new RLNG power plants are fully commissioned.

The machinery group imports according to the SBP data are up by 15 percent to $5.3 billion. The PBS data suggests that machinery imports stood at $7.8 billion in Jul-Feb. As explained in recent SBP report, the unusually high variation between PBS and SBP data is just not the difference of actual shipment and payment; but part of CPEC related imports are not recorded by banking channels and are not represented in the SBP data. That abnormality is understating the imports and current account deficit.

Of late, some CSF money has flown in to tame services trade deficit. The worker remittances fell by 2 percent in 9MFY17 to stand at $14 billion - covering 79 percent of goods trade deficit as against over 100 percent coverage in the last two years. Both the variables are adversely changing - trade deficit is burgeoning, while remittances are shrinking; hence CAD is widening.

FDI, portfolio investment, and external debt and grants covered a little over $4 billion and rest has been absorbed by reserves fall. The SBP’s overall reserves currently stand at $16.4 billion, down by $2.5 billion from its peak in Oct 16.