The current account posted a surplus for the third consecutive month – last three months (March to May) surplus stood at $1.1 billion with $255 million in May 2023. The 11MFY23, current account deficit stood at $2.9 billion – down by 81 percent from $15.1 billion in the same period last year. Had the current account reduction not been pronounced, the country could have defaulted on its external payments. Thus, irrespective of the side effects of the imports’ restrictions, the ship is afloat to date due to these stringent measures.

In 11MFY23, imports are down by 24 percent while the exports are down by 12 percent. The reduction in both areas is partially contributed due to commodity prices softening (major impact is yet to come). The other reason for the sharp decline is import restrictions and demand destruction. And import restrictions have an adverse impact on the export value chains that has lowered total exports revenue.

Moreover, some of the imports’ payments have moved to the informal channels (smuggling and by using SBP’s 365 days deferred payment facility) where the payments are made through hawala and are being netted off by Hundi to axe formal home remittances by the same amount.

One glaring example is of mobile phones where the imports in 11MFY23 registered at PBS (FBR data) are at $516 million while the toll is mere $89 million at SBP (payment data). This means around $400 million worth of phones (and parts) are imported through legal channels; but without any payment. The importers most likely may have used SBP 365 days deferred payment facility. However, in reality, no exporter to Pakistan could extend trade credit for 12 months at a time to any Pakistan based businesses. Hence, the payment must have been made through hundi-hawala system.

This is just one example. There are many others. Many importers have used this channel in the last few months. And it may also be the case in petroleum where anecdotes suggest that the volumes of diesel imports from Iran have picked up. The imports made with an informal payment mechanism are not reflected in the aggregate import bill; but surely are part of the current account deficit, as there are reductions in remittances which are down by 13 percent to $25.6 billion in 11MFY23.

Having said that, one cannot discount the demand destruction which is caused by almost all-time high inflation and interest rates hike. The non-oil and non-food imports are down by 40 percent in 11MFY23 while food and petroleum imports are up by 2 percent and 5 percent, respectively.

Lately, commodity prices are softening and that has a larger impact on food and oil imports which have not fallen in tandem with other imports. Interestingly, both crude and petroleum products quantities have declined significantly –13 percent and 39 percent, respectively, in 11MFY23, and based on the PBS data, and there is a similar decline in the value of these imports.

However, there is some uptick in the value in SBP payment-based data which suggests that last year some other (unexplained) imports were disguised in the PBS imports andnot reflected in payment, though. And the other reason for this anomaly is that the highest volumes and value (due to peaking of commodity prices cycle) of imports were in the last quarter during the previous year. Since payments are with a lag, some payments may have been recorded during early months of FY23.

This is evident by the recent fall in the 12M moving average of petroleum imports - the number may decline further going forward. The oil prices in 11MFY23 are almost like what these were in 11MFY22. However, prices are down by 37 percent from the June 2022 peak. This is good news, as oil imports’ value is likely to taper off going forward.

The story of palm oil (recorded in food group) is not much different where the prices last month (May 23) were down by 46 percent from its peak in May 22; but the import value is up by 4 percent in 11MFY23 and same is the increase in volumes. It is expected that the import bill of palm oil will fall significantly in the coming months, provided prices do not reverse direction.

Once the food and oil imports value taper off, government and SBP would have space to slowly open the rest of imports where the value chains are adversely impacted. However, for that to happen, the country must get back onto the IMF track.

If imports are relaxed, and the gap between open and interbank exchange rate markets narrows (which is a condition of the IMF), home remittances are likely to grow. On 12M rolling basis, remittances decline is steeper since Nov 2022 which coincides with the timing of growth in hundi and hawala. The fall is higher from Saudi Arabia and UAE which is contradictory to the trend of increasing number of workers going there. These may rise again once the hundi hawala decline. There are earlier signs of it happening – mainly due to crackdown on some informal exchange companies.

Thus, going forward, food and oil imports are likely to fall, which may allow SBP to loosen the imports restrictions and have a positive impact on remittances. However, if there is no IMF (in the next few months), then all the bets are off.

Now the issue is exports. Here apart from value chains disruptions, higher energy prices (as exporters are now cross subsidizing some domestic and other consumers) and the end to lucrative export financing facilities are hurting the textile exports. The efficient players stay strong while others may not.

But a silver lining is virtually now in every manufacturing sector, people are looking to find export avenues to finance their import needs and to survive. Many textile and other sectors have untimely expanded (due to TERF) more than was needed. They must work around to find export avenues. The good news is that global textile demand is picking as last year higher accumulation of inventories are replenishing and buyers are demanding more. However, buyers are not trusting continuity of value chains in Pakistan due to fear of default.

A similar trend is visible in services where individuals other than ICT are also looking to earn income in foreign currency. All these will be reflected in numbers in the coming quarters. The key is to manage the growing external debt repayments which could make the next fiscal year extremely difficult.