The current account deficit keeps on growing; up by 122 percent to $5.0 billion (4.4% of GDP) in Jul-Oct17. Of course, the main culprit is imports which increased by 26 percent or $3.6 billion to reach $17.4 billion in 4MFY18, according to data reported by the Central Bank (differs from numbers reported by PBS). Rising imports is both good and bad. Good because imports are signs of continued consumerism and construction growth.
The good news is the exports are picking, up by 11 percent or $778 million to $7.7 billion in 4MFY18. However, the gap between goods exports and imports is widening whilst remittances inflows are flat. Thus the widening trade deficit, up by 35 percent or $3 billion to $11.4 billion, explains the burgeoning current account deficit.
The question is how to react to the growth in imports. If efforts are put in to breaking the imports growth, it would affect economic growth as well. The GDP might lose its momentum in the process. Globally, economies are finding it hard to grow while the Pakistan economy is all set to grow by 6 percent in FY18; and higher imports at home in days of low commodity prices, is just a consequence.
But still the need is to curb some sort of imports. Let’s delve into the numbers and see where the room is to compress the import bill. Based on PBS data for Jul-Oct 17, since SBP numbers are yet to be announced, the imports are up by 22 percent. And no more the machinery imports driving the growth as the country is still heavily importing machinery but the number is marginally down from the corresponding period last year.
Hence, the mantra of higher imports due to economic expansionary cycle is no more valid. The growth is now broad based as is economic growth. Food imports are up by 20 percent and it constitutes 11 percent of total imports—within that cooking oil, both palm and soya bean are taking a lead as people are consuming more fats as their earnings fatten.
The transport group imports are up by 37 percent; its share in total imports is low; but it is increasing. There is slowdown in CBU units imports in October but is well compensated by CKD imports. That is a good sign as higher CKD imports, implies more vehicles are assembled in the country and is visible from upbeat automotive sector growth in LSM.
The elephant in the room is petroleum group; and unlike 2008, the higher growth in the group is not because of prices; but attributed to a huge jump in quantity imports. It had been losing its share to machinery in the last two years, but now it’s back to be the leading imports as its share in Jul-Oct17 stood at 23 percent of total imports. The petroleum products imports in value increased by 31 percent while quantity imports growth is whopping 52 percent.
Mind you, the growth is already on a high base. That is what happened when the policy makers don’t curb the demand by taxing consumption. How long can this go on? It has an impact on environment too as smog is in its fifth season in Punjab. Petroleum prices in many similar oil importing countries are much higher than in Pakistan with a higher growth rate and this challenges the port handling capacity as the refining ability is shrinking.
However, this all seems to be a non-issue for policymakers. The LNG imports stood at half a billion dollar in four months, up by 60 percent. And this will grow further up as the country handling capacity is doubled with opening up of new terminal earlier this week.
Similar is the story of agriculture and chemical imports, and metal group; -22 and 41 percent respective growth can be seen in tandem with economic growth in the sectors. Thus, the story of imports is simple; barring petroleum products consumption; nothing much can be curbed without hurting the growth momentum.
On the export front, there is some encouraging trend; yet it’s a long journey. The textile package is yet not in full swing; but much cannot be expected from exports in the short to medium term. Same is the tale of remittances as it cannot wither the increased trade deficit.
Thus, the current account deficit is ought to remain high and curbing imports can jolt the growth momentum. The focus should be on capital and financial accounts as flows within these can stop the fall in reserves. The good news is the FDI is picking up— increased by 75 percent in 4MFY18 to $941 million.
All the eyes are on road shows that are going to be started soon for issuance of Euro and Sukuk bond in December. The need to have an active finance minister cannot be over emphasized as international investors would have a keen eye on domestic political uncertainty. Dar should resign and let the others take the rein of the economy.
The other welcome move is the news of CSF flows to the tune of $700 million to come in the economy in FY18. As of now, a bit of FDI and rest of short term debts are not letting reserves to fall in line with CAD. The CAD was $1.3 billion while the overall foreign reserves virtually remain same, thanks to over $800 million loans.
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