The current account deficit at $822 million for Mar19 is little higher than market expectations, but the direction is right and Jan-Mar19 monthly average CAD stood at $658 million. It is likely to stay around $500-600 million in coming few month. That is a significant improvement from average monthly CAD of $1.5 billion in Jan-Dec18.
The strategy of import compression is working, but broad based economic slowdown is causality in the process. Since around two fifth of FBR revenues are collected at import stage, low imports are contributing in falling growth in tax revenues (read 'Import compression and taxation'). Few are worried about the fact that exports are not growing along with currency adjustments, but it was not even expected.
The exports are close to its full capacity and without expansion or restarting sick units, exports would not grow much. Seeing a few big textile groups in expansion phase, the value added exports may grow in a year or so (read 'Betting long on textile exports' and 'Textiles ready to take off').
In case of sick units, the bankruptcy and recovery laws are to be modified to let fresh investors come in and buy units stuck with banks. There are Rs182 billion NPLs in textile, and many sick units are pledged with banks. The newly formed economic advisory board is dominated by bankers, and they should come with ideas to revive these textile units by restructuring loans and by streamlining bankruptcy laws.
The government should do away with direct energy subsidy to textile because such measures cannot really boost exports and in days of tight fiscal space, it is not advisable to continue with direct fiscal export subsidy. The modus operandi should be to have same energy prices across the country for exporting and ideally it should be same for all the industries. The cross subsidies within consumers should be abolished to make energy regional competitive for industrial sector without direct subsidy.
In short, the numbers may not be showing the exact picture as in various industries, import substitution is happening. A leading player in footwear retail market told BR Research that last year around 60-70 percent of shoes the company retailed were imported and now the equation is other way round with import component reduced to 30-40 percent. Since domestic production is becoming viable, one of such import substituting industries may start exporting in years to come.
However, conducive economic environment is a prerequisite for such dreams to come true. Let's get back to today's reality. In Jul-Mar period, exports have largely remained flat and in March on monthly basis exports inched up a bit. The SBP data for March is not uploaded yet, the PBS numbers suggest that textile exports is largely unchanged, but uptick in food exports happened in low value added items like rice, vegetables, sugar etc. On quarterly basis exports are up by 4 percent.
The story of imports is a bit better. The toll is down by mere 5 percent, but the encouraging trend is visible from the third quarter where on quarterly basis imports are down by 11 percent and on yearly basis the toll is down by 16 percent. The import compression is not much visible on non-essential food items which a few ECC members talked about - cheese and stuff, but the fall is mainly in machinery (21%) and transport group [36%] respectively. The recent non tariff barrier of having items only with Halal written in Urdu may reduce otherwise a relatively less elastic imported food demand.
The overall trade deficit of goods improved by 23 percent in third quarter over previous quarter and 26 percent on yearly basis. The story is more encouraging in services trade, where on yearly basis the deficit is reduced to half. The trade services improvement is mainly due to fall in imports while the export potential is largely in ICT and tourism which is untapped.
The home remittances improvement was mainly in the first two quarters of this year while the third quarter is a bit slow, yet it's better than the same period last year. The coming quarter will have some seasonal jump related to Ramadan and Eid related money sent back home. This will further help ease CAD in the fourth quarter of this year.