The tightening measures - currency adjustment and interest rates hike, so far have not yielded any meaningful impact on the current account on yearly basis - CAD fell by 10 percent to $6.1 billion in 5MFY18 while the goods trade balance worsened by 5 percent. The home remittances growth of 13 percent has compensated the hike in trade deficit.
This snapshot does not reflect the true impact of adjustments; but the results are likely to be more pronounced in 2HFY19. The argument is constructed on two premises - one is that current account deficit has slowed down from the levels of 2HFY18 - the average monthly deficit is down by one fourth from $1.7 billion (Jan-Jun18) to $1.2 billion (Jul-Nov18).
The second factor is extracted from the volume of imports and exports, and based on commodity prices of imports and increased market access of exports to China. These can yield in further cutting down the average monthly deficit to $0.8-1.0 billion during Jan-Jun19.
In case of imports, the number is down to $4.3 billion, by 9 percent as compared to imports in October. However, it is not fully reflecting the economic slowdown, and low oil prices - for example, the crude oil average imported price, as per PBS data, came at $75/barrel versus actual average prices of $65/barrel in November. That is probably due to higher imports in early part of month or the contracts were made in previous month when the prices were high.
The point is that the oil price fall is not fully reflecting in imports number, and the impact may translate into SBP import numbers by January 2019. Considering the fact that oil prices slid further in December 2018, the February 2019 oil imports number will even be lower. The other factor for relatively low decline in oil import bill is unnecessary furnace oil imports in November. In a nutshell, the import bill may come under $4 billion a month in the second half of the fiscal year.
The story of exports has no glamour so far to justify the sharp currency adjustment. It has remained flat in 5MFY19 with average monthly flow barely touching $2 billion. The exports, especially the value added textile, do not have potential of more than 5-10 percent growth due to currency adjustment within the existing capacity constraints. The value added textile exports have a potential to leap forward - for details read "Textile ready to take off" published on 14th December, 2018.
However, the question is that exports are seemingly not showing even 5 percent growth. Yes, that is true in value terms, but it has other factors - for instance, in case of garments and knitwear, the volumetric growth is around 20 percent each for 5MFY19, but in value terms the garments numbers remained flat while knitwear growth a mere 10 percent. It is hard to pinpoint the exact factor without data for coming months.
The problem is in cotton yarn and cloth where exports are part of global production chain and Pakistan has become a victim in the trade war between two giants - China and US. The good news is, with truce in Argentina, the exports in low value added textile sector to China may pick up in the second half of the fiscal year.
The other low hanging fruit is to gain from FTA2.0 which is likely to be negotiated soon, Razaq Daud is confident that combining wheat, sugar and rice, Pakistan exports to China can increase by $1 billion per year. Let's see how much of this translates into actual numbers.
The disappointment in November is in remittances which are down by 20 percent on monthly basis to $1.6 billion from $2 billion in Oct18. It is hard to make a story based on monthly numbers as the decline could be adjustment from high remittances in October. It could be due to falling expectations of expats on the new government, and other factor could be the low oil prices which may have adversely impacted the remittances for the GCC. Anyhow, a decent growth of 13 percent in remittances during 5MFY19 is encouraging.
That is the story of current account; in the balance of payment equation, $1 billion from KSA will not let the reserves to change much from the level in Oct18. The FDI is up in November; but covers a mere one fifth of the current account deficit. Seeing this, the SBP might be lured (read under IMF pressure) for more tightening- both in monetary and exchange rate policies.
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