CAD leashed!

The current account is coming in control. It stood at $316 million in September 22. In the Jul-Sep quarter, the current account is down by 49 percent as compared to previous quarter and down by 37 percent versus quarter last year. The prime reason of decline is control on imports, and growing backlog of payments. The country’s ability to paying for its external imbalances diminishes with dwindling forex reserves. The conventional measures of exchange rate adjustment and interest rates hike take time to translate into demand destruction. And that policy is partially undone by continued fiscal slippages –feeding to current account deficit. Hence ministry of finance and SBP came with an idea to control imports. That is working but at a cost of massive decline in large scale manufacturing (LSM) growth and job losses.

Whatever the reason, the deficit is tamed. The 12-month rolling average of both current account and imports are changing directions. That is a sign of relief. However, sooner or later SBP must end this control on imports. That is only possible with demand destruction. That is happening. But not at the pace warranted. One must not forget SBP is still running negative real rates and the sitting finance minister desires to appreciate the currency further. Then he wants to reduce the energy prices. Sir, you cannot have the cake and eat it too.

With global recessionary trends, there is a marginal decline in both exports and remittances- down by 13 percent and 7 percent respectively in Jul-Sep as compared to the last quarter. That is why singular focus is on imports reduction. Imports are down by 14 percent in the quarter. And the number is below $5 billion in September.

In Jul-Sep the machinery imports are down by 36 percent from the previous quarter (33% yoy) to $1.5 billion. There might be some impact of demand curtailment, but the lions share is of administrative control. There is roughly saving of $900 million a quarter –$300 million a month.

The biggest fall in the mobile phones – down by 80 percent in the quarter. The toll stood at $71 million in the last quarter versus $500 million at peak. The number is to normalize to $80-90 million per month.

The other restriction is on automobiles. The imports are down by 50 percent in the last quarter to $409 million. And it will remain like this. There would be saving of around $150 million per month. Then there is indirect impact of hindrances on other areas. Conservatively, monthly decline is $500 due to import restriction. And without it, the current account could have been $800 million last month.

One other reason for lower imports in September is 33 percent (MoM) decline in petroleum group to $1.5 billion. The average monthly import in the previous three months was $2.5 billion. The payments of imports are done with a lag. The story is known to all. In May and June, the new government imported higher volumes of petroleum (including LNG) at peaking prices to end loadshedding. Petrol and diesel imports were higher due freezing prices.

There was an element of hoarding in it. Hence, stocks got piled. These were used later. The imports then remained low in Aug and Sep as these stocks got replenished. Petroleum imports will normalize soon, keep a close eye on the LPG imports (if happening through legal channels).

There is contrasting trend in the food imports – these are up by 40 percent this quarter (QoQ). Palm oil is up by 51 percent while the international prices are falling. Market players say that it is being exported to Afghanistan in PKR.

The forex burden is ours. Then there is other foods items importing from Afghanistan while payment in foreign currency is being bought in open market. The numbers are not in official imports. Some of the remittances got netted against informal import payment through hundi hawala system. The impact is reflected in overall balance of payments, as the supply from exchange companies to interbank market has thinned. And that is putting pressure on PKR.

The story of exports is not good. Exports are down by 13 percent to $7.6 billion in Jul-Sep as compared to the previous. On yearly basis, they are up by 5 percent. There is little element of seasonality in decline. Food is down due to floods – mainly rice. Textile is down due to global recession. Things are looking similar, if not bad, in this quarter. This coupled with remittances losing steam with no pick in other current transfers (charity and donations due to floods), import is the only thing that can be controlled and so it shall be.