The current account deficit has reduced to $242 million in Jan-23- lowest in twenty-one months. The deficit is down to a tenth of what it was in the same month last year. In 7MFY23, the current account deficit is reduced to one-third. Many are of the view that lower CAD is due to imports’ restrictions and once the imports normalize the deficit blows up again. Well, they are half right.

Imports may increase once the restrictions are lifted, but at a smaller pace, as falling purchasing power has a role to play. Plus, the remittances are also likely to normalize, as these are down for two reasons – one is speculative activities due to a fear of economic default. And the other is the growing shift of imports to hundi/hawala informal system due to restrictions on official channels. Imports will be normalized only when the fear of default is gone, and that would boost remittances. Hence, default or no default, current account is likely to remain low and manageable.

The imports stood at $3.9 billion in Jan-23 and $33.5 billion in 7MFY23- down by 21 percent from the same period last year. The decline in imports (barring food and petroleum) is 38 percent while it is up by 12 percent in food and oil. Going forward, petroleum imports may fall a bit due to less demand – already on volumetric basis, petrol and diesel consumption is down by 15 percent and 23 percent respectively in 7MFY23. The electricity consumption is also down by 8 percent.

There is a need to push this further down by taking some administrative measures, as summer is approaching, which is peak demand season. The government should lower the working week for offices, schools and commercial activities and should have a solid day saving plan to make sure shops close on time. This would also help in opening the other imports which are now restricted.

The petroleum imports in 7MFY23 increased by 17 percent to $11.3 billion and this number has to be brought down through some restrictions while there would be some decline naturally due to demand destructions. Then prices also have their role to play.

In the case of food, the imports are up by 3 percent to $5.1 billion in 7MFY23. In this, wheat component has doubled to $591 million and another $250 million import of wheat is perhaps required. Then there is a strange behavior in pulses, soya bean and palm oil; the volumetric growth is puzzling as it is happening at a time of falling income and growing international prices. There could be a case of smuggling or hoarding which needs to be probed.

For rest of the imports, the biggest decline is in transport section where the imports are down by 60 percent to $851 million in 7MFY23. This is primarily due to import restrictions and now the demand is being suppressed due to an exceptional increase in prices.

The story of the exports is not very encouraging which are down by 7 percent to $16.4 billion in 7MFY23. The dip is higher in the non-textile sector which is down by 18 percent while the textile exports remained flat. One reason for the lower imports is the slowdown in the global economy while the absence of raw materials in some sectors could be a cause as well. Once imports normalize there will be some pick in the exports as well.

One big worry is the fall in the workers’ remittances – down by 12 percent in 7MFY23. This is despite the fact the workers going abroad have been increasing lately. In 2022, 832k workers registered for overseas employment. This number is almost four times the average workers moved out in the last two years.

And most of the workers registered are blue collar workers and they all send major chunk of income back home. Thus, the remittances coming home should be higher; but perhaps, people are using informal means to send back money home – especially in the last few months when the gap between the interbank and open market was very high. Now that has been normalized and based on banking channel checks, the expected monthly remittances will be $2.3-2.4 billion in February 22 versus $1.9 billion in January. And with normalization of imports, the monthly number could approach $3 billion a month.

Thus, overall current account remains in check until the economy remains slow which is likely to be the case for the next 18-24 months. The worry of bursting current account deficit after lifting import restrictions is a bit exaggerated.