Sky-high imports

Brent hit $70/bbl last week and it must have sent some shivers down the spine somewhere in Islamabad. Pakistan’s trade deficit is all but set to cross exports for the second year running. Imports are coming fast and easy. Imports in 5MFY18 are up by a small matter of 24 percent year-on-year at $21.88 billion, based on the SBP numbers.

The provisional PBS numbers for December are out, and the 1HFY18 imports stood at $28.97 billion, which when discounted for SBP numbers, would come around $26.34 billion. Petroleum imports have constituted around 20-22 percent of Pakistan’s total imports in the last three years. This number is all set to go up, and could be scary, especially when non-petroleum imports are refusing to recede. (Read: Scary rise in imports; published on November 15, 2017).

Here is an attempt at a crude sensitivity analysis of Pakistan’s import bill in general, and energy import bill in particular, in context of changes in international oil prices. Should Brent average $60/bbl for the remaining six months of FY18 (current rate: $70/bbl), Pakistan could be looking at an oil import bill of $12.96 billion.

This is based on using very crude method of average of monthly dollar imports to Brent price, which has hovered around 18.5 in the last 12 months. The demand for two major items in petroleum imports category; crude and finished products is estimated to grow by 17 percent year-on-year to 26.8 million tons. Whatever little elasticity there maybe in the case of rising oil prices, is well covered by a fast rising LNG import bill, which could exceed $2 billion for FY18.

Yes, the furnace oil dependence has reduced, but it will have to be substituted by other fuels. And the advent of more power plants on the road and higher growth, mean imported fuel would still be required to keep the engines running. Every $5 increase in oil price per barrel would lead to another billion dollar added to petroleum imports. The base case of $60/bbl Brent price is built around the EIA’s short-term energy outlook. Mind you, the EIA is known for conservative price outlooks. (Read: Oil market: discipline, demand and disruptions, published on January 15, 2018)

The buck then passes on to non-petroleum imports, which have risen by 22 percent year-on-year in 5MFY18. Granted, that it has come from a low base, and power machinery relating to the CPEC has beefed up the numbers. But the game is far from over, as power related CPEC imports are not even half done, and more are slated for 2018 and 2019. Discounting the non-energy imports by 5 percent, should machinery imports inexplicably decide to slowdown for the remaining half of FY18, the import bill would still stand tall at around $56.8 billion, down 4 percent from our base estimate of $59.1 billion.

And it is not machinery alone, as other vital groups such as food and transport have seen a relentless rise. Will the curbing measures yield the desires result, shall soon be seen, but even if that happens, it won’t be in the last six months of FY18. The growth of machinery and related imports may cool down in FY19, mostly due to the base effect, but in value terms, it may not be much different, due to CPEC.

All imports are not bad, and in a growing economy this is bound to happen. Whether this could trigger into something more serious is the next big question. Could it lead to Pakistan knocking the IMF doors again? Watch this space for more on it tomorrow.