CAD: Controlled chaos

The current account is coming under control. This is happening under extreme strictness on imports. However, the decline in exports and remittances is diluting the impact of falling imports. The risks are in the sustainability of a low current account deficit, as sooner or later, import restrictions will be removed. Then there is also a huge backlog of external payments including dividends of foreign shareholding in companies operating in Pakistan.

The current account deficit stood at $567 million in Oct-22. In the last three months, the monthly average deficit stood at $535 million. This is less than half of the average in the first seven months of the fiscal year. In 4MFY22, the deficit is down by 47 percent to $2.5 billion. The deficit at the current levels is well manageable. The only question is of its sustainability, as demand is being curtailed artificially, and outflows are managed.

Goods imports stood at $4.6 billion in Oct22. This is the second consecutive month to achieve imports below $5 billion. The decline is mainly due to the restriction of imports to half in engineering goods and machinery – including cars, mobile phones, white goods, and numerous other machineries. The petroleum imports remained low, as higher inventories which were built at the time of peak prices are now replenishing.

One other reason for the decline in imports is a shift of payments from formal banking channels to informal hundi hawala system, as sending money through official channels is restricted. However, that has a direct bearing on home remittances which are down by 16 percent in Oct (YoY) to $2.2 billion. In 4MFY23, the remittances are down by 9 percent.

The story of exports is not that great. The recessionary fears and high inflation in the developed countries – especially the US, has dented the demand for textile. The exports are down by 7 percent (MoM) and 4 percent (YoY) in Oct22 to $2.3 billion.

Import contraction is the policy the government is adopting. However, that is not happening in all the items. The food imports are up by 11 percent in 4MFY23. These are growing due to a greater need for food items in the aftermath of floods. Moreover, food demand of Afghanistan is being channeled through Pakistan. The biggest increase in 4MFY23 is in palm oil – up by 23 percent (PBS) over a high base. This is even though prices are dipping from the peak. The story of Soya beans and pulses is similar. However, in Oct 22, on monthly basis, there is some decline in food imports – down by 16 percent to $690 million.

Machinery imports are down by 34 percent in 4MFY32 to $1.98 billion. This is mainly due to restrictions. In many cases, imports are allowed at 50 percent of last years’ monthly average. The highest decline is in mobile phones’ imports – down by 86 percent in the 4MFY23. On a monthly basis, machinery imports are down by 3 percent to $440 million. Mobile phone imports payment stood at mere $8 million in Oct22 as compared to the average of over $150 million in normal regime. That is unreal and will have to be revised in months to come.

The story of transport (automobile and all) imports is similar to that of machinery. The number is down by 58 percent in 4MFY23. CBUs are down to one fifth- and the decline in CBU car is 87 percent. In Oct 22, the CBU cars imports payment was mere $1 million – it peaked at $27 million in May22. CKD cars are down by 48 percent in 4MFY23. This is likely to be lower in the coming months. The decline in Oct22 is 54 percent year on year to $81 million. The car imports are restricted to 50 percent due to administrative control. The market channel checks reveal that the fresh demand is even below the quota levels now. The reason for the decline in demand is hike in prices, restriction on car financing and higher rates, and lower income levels.

The biggest item in imports is petroleum. Here the number is falling in the last two months. Petroleum average monthly imports stood at $1.5 billion in the last two months which is down by 40 percent from the previous three months monthly average of $2.5 billion. There are a number of reasons for the decline. On top is the built of inventory of petroleum products at peak prices and now these are being used. Then the oil prices fall is helping to tame the imports. Plus, the demand curtailment is happening due to passing on the prices to the consumers and hike in taxation. And lastly, the government is not importing any RLNG on the spot. This would result in severe gas shortage in the coming winter; but would keep RLNG imports in check.

The story of the rest of the import item is encouraging with some decline in demand. The demand destruction is going to be more visible in the coming months. And this may allow SBP to slowly take back import restrictions.

The worrying part is the fall in exports. It stood at $2.3 billion in October. The issue is that the textile orders are drying up. The buyers’ markets have a high inventory, and the new orders are reducing significantly. The textile exports are down by 7 percent (MoM) to $1.5 bn. And the story of remittances is similar. The service trade deficit and primary income balance are under pressure too. Overall, the current account deficit is down; but the risks still exist.