The current account almost stood in balance (deficit of $8 mn) in September due to lower import payment bill. The deficit in the 1QFY24is down by 58 percent to $947 million – within it, imports are down by 24 percent, exports dipped 5 percent and remittances were slashed by 20 percent. The overall pie is shrinking, as the economy has slowed down and part of the trade/remittances have moved to the informal economy.
There might be some uptick in imports in the coming quarter due to the crackdown on illegal trade of goods and currency. There might be some growth in remittances, as informal imports move to the formal channel, the demand of hawala will be down, and that will revert some remittances to the formal channels, as well.
It would be interesting to see the recovery of remittances, as higher treasury yields in advanced economies and slow real estate market at home, would keep some flows at bay. Nonetheless, overall,the current account is likely to remain subdued due to demand destruction.
The import bill payment (SBP) in September stood at $4.0 billion, and official channel imports (PBS) at the same number. The lower imports are primarily due to economic slowdown. The food imports stood at $460 million – down by 44 percent YoY and 24 percent MoM. This is mainly due to lower imports of palm oil – down by 48 percent YoY and 33 percent MoM. In the 1QFY24, the food imports are down by 26 percent YoY and up by 8 percent MoM.
The machinery imports stood at $1.4 billion in 1QFY24, which is the highest since 1QFY23. The growth is mainly driven by losing the imports restrictions, as it’s up by 65 percent QoQ. It appears that SBP is allowing machinery imports, but the demand dent is visible – as it’s down by 38 percent as compared to the 1QFY22.
Interestingly, the mobile phone imports stood at a mere $15 million on SBP (payment-based) data whereas the number is at $304 million on PBS data. There is a significant import of mobile phones, as compared to the previous few quarters, as the PBS number is highest since 4QFY22. SBP has allowed imports of CKD phone to take place and some of the factories are operating at good capacity. That is good- but the payment mystery is required to be explained by SBP.
The story of the transport sector is like machinery where the imports are up by 64 percent on QoQ while it’s up by mere 2 percent on YoY. There are some relaxations in imports while the demand is dented to keep the number low. And here the muster of payment in CBU cars being imported is like that of mobile phone.
In case of petroleum imports, demand destruction, lower prices and smuggling from Iran all have some role to play. The toll is down by 50 percent YoY in 1QFY24 to $3.1 billion and down by 12 percent QoQ. The decline is higher in the petroleum products where smuggling mainly happened. With crackdown on smuggling and recent uptick in prices – in the aftermath of Gaza War. This would keep the pressure on the imports and currency.
The story of exports is not great either. It’s down by 5 percent (YoY) in the 1QFY24 to $7.0 billion. The decline is more visible in textile sector where the toll is down by 14 percent (YoY) in 1QFY24 to $4 billion. Exports barring textiles are up by 12 percent. That is a good omen. The overall balance of trade deficit is down by 39 percent (YoY) to $5.4 billion in 1QFY24.
In the case of remittances, the decline is high and worrisome – its down by 20 percent in the 1QFY24 to $6.3 billion. One of the prime reasons for the decline in remittances is perhaps higher use of informal channels to send the money back as in most of the last quarter, the gap between the open and interbank markets was significantly high to lure chunks to move there. It would be interesting to see how much to revert with the recent efforts of crackdown.
If that does not happen, it’s likely that the current account deficit will move up. But the uptick would be limited due to demand destruction.