The current account was almost hung in the balance last month. The outcome is not natural but forced through import compression. With SBP reserves hovering around $3-4 billion for two months or so, there is no other option but to manage the current account administratively. And with the kind of demand destruction taking place, the current account deficit will remain meager once imports are normalized. The demand for currency is mainly due to uncertain economic forecasts; if the IMF progamme is back and the country gains political stability, the currency may bounce back a bit.
In 8MFY23, the current account deficit shrank by 68 percent to $3.9 billion, and the February deficit was a mere $74 million. The decline is across the board in imports, exports, and remittances. First, the imports are partially down due to demand compression and partly due to administrative restrictions. The latter is also an externality for exports, as exporters are finding it hard to import raw materials. Then the fall in remittances is partially due to the shift of imports to informal means - offset by inflows through informal channels, commonly known as hundi/hawala.
Imports in 8MFY23 are down by 21 percent to $37.3 billion, while the same stood below $4 billion in the last two months. The decline in imports, which is due to administrative controls, is not homogenous. Imports (barring food and fuel) are down by 38 percent, while food and fuel imports are up by 11 percent. Here the administrative measures have brought many industries to half and some at a standstill, while the consumption of fuel and food has remained unabated. Had there been any implementation of a smaller work-week, remote working, lesser shopping hours, and limits and restrictions on gatherings, the import-fall would have balanced out.
Food imports are up by 5 percent in 8MFY23, where palm oil has the most significant share; its imports are up by 12 percent to $2.4 billion in 8MFY23. But, surprisingly, pulses imports are up by 46 percent. However, in the case of machinery, the number is cut to half forcefully to $3.3 billion, within which only $89 million are paid for mobile phone imports – down by 93 percent. Though there is some decline in sales, phones and parts are being paid through hundi-hawala system, which is eating away a share of remittances.
Cars and other transport vehicle imports are down 62 percent to $924 million in 8MFY23. Here the decline is higher than the administrative control. The demand for cars – especially smaller is declining fast. The prices are becoming exuberant, and new bookings are even dearer. The demand is high for top-of-the-range cars and imported EVs, where only administrative measures will work unless taxation is revised upwards.
Petroleum imports are up by 15 percent to $12.6 billion. Here the prices remained high. Lately, the price increase has impacted the demand, down by 15 percent in 8MFY23 for petrol and 23 percent for diesel.
The story of exports is not rosy. It’s down by 10 percent, and the decline is higher in non-textile exports, which are down by 21 percent. However, the textile sector has been suffering lately due to upward revisions in energy prices and difficulties importing raw materials, including cotton. As a result, the industry is warning that many textile units will go out of business in months to come.
In the case of remittances, more workers are going abroad, and a few are immigrating. The job demand in Saudi Arabia is booming, and Pakistanis are going at discounts. Still, the official remittances number is falling. It’s down by 11 percent to $18 billion in 8MFY23. The number will likely remain low until import restrictions are lifted, and the fear of default is averted. The overall economic outlook is likely to remain bleak till then. But the current account would remain in control.
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