Trade deficit breathe

Imports in September 2018 were recorded at $4.4 billion – third month in a row for sub $5 billion monthly imports. September imports were also at a 20-month low, showing a marginal 1 percent year-on-year decline. Exports on the other hand were up by 3.1 percent year-on-year, resulting in a 16-month low trade deficit of $2.7 billion – considerably lower than an average monthly deficit of $3.1 billion in the 12-months leading to September 2018.

The slowdown in imports has been despite a considerable surge in international crude oil prices. Some say, it is because of it. Brent oil in September 2018 was higher by 43 percent year-on-year, yet the imports did not spike. That is because of the much altered composition of the import bill, with the rising oil prices. The petroleum import bill was identical to that in September 2017, primarily driven by nearly 30 percent lesser quantity of crude oil imported.

The higher petroleum prices at home have not really impacted the gasoline demand for the motorists. But the ever changing power generation fuel mix, from FO to RLNG and coal based plants – has ensured significantly lesser demand for furnace oil – which is reflected in the petroleum import bill. Going forward, the FO demand is expected to continue declining – as RLNG and coal plants will continue to come to full steam in the next 12 months. From the petroleum standpoint, Pakistan stands to benefit, should oil prices recede from the current multiyear high.

The real difference has been made by the slowdown in machinery imports, which is dominated by power generation and related machinery. Machinery imports at $701 million are at a 32-month low and significantly below the 12-month monthly average of near a billion dollar. As the CPEC enters the second stage, with most of the power projects either online or soon to be online with machinery already in place, and ample generation capacity, expect the power related machinery imports to stay on the lower side.

There has been some slowdown witnessed in textile machinery from previous year, but improved gas availability at reduced rates, could turn things around for the Punjab based leg of the industry. Furthermore, the imports of telecom and electrical machinery have by and large stayed intact.

While the slowdown in machinery imports may last long, that on the fuel side may not. Yes, the generation mix has improved. But all that machinery imported in the last 2 years is now being put or has already been put into use, and will require more fuel to burn. In most cases, the fuel will be imported RLNG or coal – which is still cheaper than FO – but the quantum of petroleum imports may well increase in the months to come. This should be a reminder for the policymakers to expedite work on the indigenous fuel based power projects.

With added import duties on a host of items, mostly non-essential, the surge in “other” import category could be halted. The food imports are largely dominated by palm oil, pulses, and tea – none of which has shown any signs of slowdown in demand. With the IMF programme, higher inflation and austerity drive around, the consumption patterns could well be tested via purchasing power limitations. All in all, imports should not see a repeat of FY18. Could this be backed by a decent surge in exports? More on that, later.