There is no respite to current account deficit. It stood at $1.4 billion in Nov-2017 to make the Jul-Nov deficit touch $6.4 billion - 4.5 percent of GDP - up by 91 percent year-on-year. The authorities have somehow realized the gravity of the issue and have imposed regulatory duties on an array of imports, and have depreciated the currency by around 7-8 percent in this fiscal year.
The numbers are yet to speak for the measures. Is it a case of too little tightening? Well, the impact of regulatory duties imposed would start reflecting from December figures; though dent would not be much. In the recent round of 5 percent currency depreciation, the impact may surface by January 2018. Hence, it’s time to wait to realize the impact of steps taken to curb the current account deficit.
But the way, current account deficit is growing without any brakes; the case of monetary tightening is becoming imminent as the currency depreciation alone might not be enough to curb the import demand. Let’s see how policy makers react in the upcoming review of January; by that time, Dec CAD numbers would be out to judge the impact of recent demand curbing measures.
The story to date is cutting a sorry figure. The good news is that exports have finally started to move up a bit. The numbers grew by 12 percent in Jul-Nov with the incremental growth being observed every month. Food exports are up by 16 percent owing to onetime jump in sugar exports; a similar boost is needed by exporting accumulated surpluses of wheat.
In case of textile exports, the value added sectors are showing some promise as exporters are benefiting from the cash rebates in the textile package. The recent 5 percent fall in currency may push exports proceeds further up in the months to come. Similar is the story of value added sectors in other manufacturing as leather manufacturers’ exports are up by 29 percent. The toll is set to come close to the peak of FY15 in FY18.
That is the story of exports as even after double digit jump, the sector is struggling to regain the lost grounds. On the flipside, imports are constantly growing at a high pace - up by 23 percent in Jul-Nov. Just to have perspective, incremental exports for Jul-Nov stood at $1.1 billion, while imports are up by $4.2 billion. The increase in imports is four time the exports on an already too widened trade deficit.
The point is that there is no way that the exports growth can substantially reduce the CAD; the onus simply falls on decline in imports. But that is not happening. The growth in imports is broad based - food imports are up by 19 percent with the bulk of increase emanating from cooking oil.
In case of machinery imports, the economic expansion is so far unperturbed by the balance of payment and political worries. They are up by 27 percent where the lion’s share in growth is taken by power and electric machineries. Too much electric power is coming into the country, which may surpass the country’s importing capacity; and electricity distribution threshold may reach soon. No need to mention the inefficiencies demonstrated by the government as PSO is exporting back the imported furnace oil after paying demurrage charges.
However, the recent shift in power policy for new projects from capacity payment to take and pay policy may put a stop on the staggeringly growing power supply. The textile machinery growth is moving up, which is showing that the players are pumped up by recent measures.
The elephant in the room is petroleum imports; they increased by 29 percent to reach $5.3 billion. The demand can be curtailed in the short run by jacking up petroleum prices, and in the long run by developing indigenous energy resources. The FO imports may come down going forward, but the RLNG imports would surely surpass the replacement.
The transport group imports growth is outpacing the other goods imports; and this can be curbed through interest rates tightening as auto finance is a big beneficiary of low interest rates environment. Similar is the story of the metal group in which iron and steel imports are up due to protection; the industry is expanding and monetary easing is helping construction grow. Plus, the infrastructure building is rampant close to elections.
The imports growth can come down but at the cost of sacrificing high growth in auto, power and steel sectors. It’s a bitter pill that the economy must take. Sooner the better.
The trade deficit stood at $12 billion, up by 34 percent, while the remittances remained flat (up by 3% to $9.8bn) to explain why CAD is growing furiously. The FDI is up by 57 percent to $1.1 billion to fill in some foreign financing gap. But again, it’s too low to make any meaningful impact.
The SBP foreign exchange reserves came down by $3.2 billion in Jul-Nov. The government raised $2.5 billion from global bonds in December and is planning to go for another round of financing soon. Looks like the idea is to keep on borrowing growth no matter how expensive it is.
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