The current account deficit is down to $579 million in July19; almost one fourth of what was in the July18 – just before PTI assumed power. The good news is that imports are coming down consistently – in 7MCY19, average monthly imports are down by 18 percent – from $5 billion to $4.1 billion. The demand compression policies are working, at the cost of employment, high inflation and low growth.
A few optimists are excited on the exports number picking up to $2.2 billion in July – up by 24 percent from Jun19; but it is lower than May number – so last three months’ export is averaged at $2.1 billion – only $100 million monthly addition of past three years’ average monthly export. In 7MCY19, the monthly average exports are down by 2 percent year-on-year.
The story within trade balance of goods is that imports are down and the trend is visible while there is no change in exports as such. It has been 20 months since the currency adjustment started and it should be good enough time for results to start showing– which come with a lag of 6-18 months. The REER is at 90.5 which is clearly showing an undervalued currency and that could help exports pick up.
However, International cotton prices are down by 30 percent in last 12 months and more than 55 percent of Pakistan’s exports are textile. Thus the gains of undervalued currency in value terms of exports could be offset by decline in prices. Thus, attaining IMF projection of $26.8 billion exports in FY20 is a difficult task.
The fall in commodity prices is across the board as Sino-US trade war has resulted in global economic slowdown and shrinking cross border trade. Since Pakistan is a net importer, the benefit of oil and other commodities and chemical prices ought to be higher than the loss due to falling cotton prices.
Thus, the CAD target of $6.7 billion (monthly average- $558mn) is likely to be achieved as imports could be less than projected $51.7 billion. The government’s focus is on curbing imports and it is yielding results. Apart from currency and interest rates movement, some non-tariff barriers are imposed on food items imports, crackdown on smuggled goods is on the rise and domestic final goods consumption is low to lower the raw material and intermediate goods imports – such as lower sales of automobiles resulting in lower imports of parts.
A positive element of imports becoming expensive is initiation of import substitution – there are opportunities of making goods cheaper at home. There are some signs of it – (read “Micro silver linings in macro abyss”).
The detailed trade numbers are yet to be released, but higher benefit in import reduction is to come in petroleum imports (in Jul18 it was $1.8bn); the lower oil prices and better weather has resulted in both lower value and volume imports. In case of motor fuel, the consumption is falling as well. In other areas, the food imports are likely to have a higher hit – based on June numbers –tea, palm oil and dairy products are the key categories.
The goods trade deficit gains in July are partially offset by higher import in services and lower primary income credit. These numbers fluctuate, and may come better in August, but the gain is to be mitigated by lower exports. The workers’ remittances were up by 24 percent on monthly basis as Eid related flows were there. This may adjust in August.
The overall CAD may hover around $500-600 million monthly for FY20. In case of financial account, due to flow from IMF, the toll is increased by $883 million. Going forward, the financial accounts are likely to remain positive. The SBP’s goal is to keep CAD to a level where it can be financed – it did in July; as long as this continues, there is no rationale to further depreciate an already undervalued currency or to jack up interest rates.