The current account deficit stood at $7.8 billion (2.8% of GDP) in Jul-Dec18, down by a quarter from the previous half – the CAD was $10.6 bn (3.4% of GDP) in Jan-Jun18. Currency adjustment, interest rates hike, and other measures are demonstrating progress. Albeit, the slow place coupled with higher than expected Dec-18 deficit numbers are building anxiety.
The CAD reported at $1.7 billion in Dec-18 while the market was expecting the toll around $1 billion, the estimates were based on PBS trade numbers - the import bill came around $500-600 million more than what was expected. The PBS imports are based on CNF (cost and freight) basis which includes the shipping and other associated costs while the SBP numbers are reported on FoB (free on board) - on average the CNF is estimated at 8 percent. And not all the goods imports in PBS are necessarily reported at SBP as gift items are recorded at PBS but individuals usually do not report to SBP. On average PBS imports are recorded 11 percent higher than SBP in the past fifteen years.
In Dec-18, the PBS imports bill stood at $4.4 billion and based on historic average, the SBP imports should have been $4.0 billion. However, the actual number reported was $4.6 billion - the CAD slippage from estimates is similar. The apparent reason for the anomaly is pent-up of imports which were piling up in the past few months. Every now and then, such adjustments take place and the occurrence is usually at the end of fiscal or financial year.
The adjustments are done, and in Jan-19 import bill may fall to normalcy. The trend of imports could be gauged based on the PBS numbers. The PBS monthly imports averaged at $4.7 billion n Jul-Dec18, down by 13 percent from average of $5.4 billion in Jan-Jun18.
It is pertinent to note that the decline is not attributed to oil prices fall as petroleum imports remained virtually unchanged and the oil prices average trend is no different. Similarly, no visible change came in food items, and agriculture and other chemicals. A significant fall is observed in machinery imports (monthly average down by 26 percent or $264mn), transport where the toll is down by 37 percent or $145 million and metal imports are down by 10 percent.
The decline in machinery is mainly due to halt in power generation new projects, slowdown in construction and lower imports of mobile phone. In case of transportation, biggest dent is in completely or semi knock down (CKD) units, which implies that imports are down due to slow production in local automobile industry. The higher prices of cars after currency adjustment and increasing financing cost due to hike in rates along with disallowing non-filers to buy cars have done the trick.
There is no need for further interest rate hike to lower machinery imports for expansion or to cut automobile (CKD) for consumption. The surgical strike is required to lower the petroleum import number. The good news is that average oil prices moved down by 30 percent from Oct18 to Dec18 while the PBS petroleum imports down by 19 percent in the same time. The number can further be compressed by higher taxation on petrol and diesel.
The point is that PBS import bill can come down to $4.2 to $4.4 billion per month in Jan-Jun18; and this would translate into SBP imports of $3.8 - $4.0 billion per month - down by $1.4 - 1.6 billion per month from imports peak in Jan-Jun-18. The import compression is pretty decent and no need of any further currency adjustment and especially there should be no further hike in interest rates.
The story is in how to revive exports - the exports in Jul-Dec-18 fell by 9 percent from the numbers in Jan-Jun-18 while on yearly basis in Jul-Dec-18 exports stagnated. The currency depreciation is apparently not doing the trick. The food exports fell as sugar, rice and wheat exports were down in Jul-Nov-18 which may pick up on months to come as these commodities are demanded by China. Similarly, the low value-added textile could not pick up in Oct-Dec-18 due to trade war between the US and China. Now following the truce with Argentina, the toll could pick up. In case of value-added textile and other sectors, the capacity constraints are hindering firms to benefit from better pricing.
The expectation is for exports to pick up by $200 million monthly to take the toll up to $2.2 billion per month. Together the impact of imports and exports, the trade deficit to be down by $600 -$800 million per month in Jan-Jun-19. To go beyond, the capacity of existing exports sector needs to grow, and more importantly new avenue of exports are needed both in terms of market access and products sophistication.
In case of remittances, 10 percent growth on year on year basis in Jul-Dec-18 showing results of currency depreciation. The potential is huge as in recent past the impact of currency fall in economies has been profound on home remittances and tourism. The remittances can jack up significantly by curbing money laundering as the amount is usually netted against remittances which in essence does not reach home.
The bottom-line to-date, the slowdown in imports will have significant impact on lowering CAD in months to come; but there is not much juice left, and further monetary tightening can be counterproductive. The real performance is to be tested by enabling export investment and remittances growth.
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