August turns out to be a breather against otherwise fast growing current account deficit; after four consecutive months of $1 billion plus deficit, the CAD has tamed to $550 million (Average monthly CAD $1.6 bn in Apr-Jul). Nonetheless, the deficit in Jul-Aug more than doubled on yearly basis to stand at $2.6 billion (4.6% of GDP).
Does relatively lower deficit in August imply a change in trend? Not at all; the CAD in July at $2.1 billion was a little too high, and the number has just normalised in August. Secondly, the seasonal uptick in remittances helped in temporarily taming the deficit.
Anyhow, a healthy growth of 15 percent on monthly basis in exports is encouraging; but the gap between the exports and the imports has widened to an extent that nothing short of curtailing imports can save the economy.
The exports are up by $276 million (15%) in August over July; but major contributor in trimming trade deficit is the decline in imports - down by $458 million (10%).
Together, these two thinned the trade deficit by $734 million (25%). CAD has been further eased by $431 million (27%) increase in remittances as Eid related spending came to rescue (for more details, read 'Reading remittance spike', published on September 13, 2017). Clubbing remittances and trade deficits improvement, explain the $1.15 billion or 76 percent of CAD reduction.
What if remittances and imports normalise in Sep? And even with high exports, the CAD would surely be north of $1 billion next month. In a nutshell, the only practical way to curb CAD, in short to medium term, is to curtail imports one way or the other.
How can this be done? It is imperative to curb all kind of imports and this should not be confined to non-essential or luxurious imports but also to unrealistic growth in essential imports. For instance, in FY17, Completely-Built-Units (CBU) of motor cars increased by 27 percent to $414 million.
The quantum of increase in CKD parts of motor cars assembling here is even higher- increased by 30 percent to $675 million. Domestic car assembling is expected to double in 3-5 years; and with the current level of localisation, the import component would double as well. Hence, it is important to have higher level of localisation in the automobile industry.
That was just one example; there are bigger elephants in the room. The food imports at $5.5bn in FY17 were 2.6 times the food exports of supposedly an agrarian economy. Why can't we make palm oil in the country? This one import item is costing the economy over $2 billion of foreign exchange a year.
Yes, machinery imports are healthy as these one-time imports would add economic and manufacturing capacity of the country. The toll at $7.9 billion, according to SBP data, was 16 percent of total imports in FY17. Once the expansion cycle is over in FY18-19, this number may thin in the following years. But then there would be additional import component for virtually every value addition to be done for domestic economic consumption.
The simplest example is of power generation, for which additional fuel is required for every new plant.
The fuel import is already too high and it is one non-essential import that can be discouraged through pricing measure. As per PBS data, petroleum products quantity increased by 46 percent in FY17, while crude imports were higher by 37 percent. This has more than an offset the impact of low prices.
The petroleum prices in Pakistan are much lower than similar oil importing countries. If the government is serious in curtailing import bill, it should immediately revise up the petrol prices by at least 20 percent. The petroleum group constitutes over 20 percent of imports and any cut in this head would be meaningful.
That's is the story of imports. In case of exports, textile package is seemingly working out a bit. But it's not enough to significantly dent the CAD. Similar is the story of home remittances. The bottomline is that the current account deficit is likely to hover around $1 billion a month at best without some sort of tightening.
Will the government take these tough political decisions? With the lower deficit in August, and better FDI numbers in Jul-Aug amid some short-term borrowing to halt the trend of falling reserves, the government might opt to wait and watch!