Current Account: A breather but not yet a relief

The 72 percent decline in the current account balance for the five months ending November offers some relief.
SBP data shows that growth in exports outpaced that in imports, up 17 and 9 percent to $9.03 and $13.5 billion, respectively. Further support was provided by the continued rise in worker remittances that jumped 16 percent year-on-year to $4.4 billion.
Though global oil prices are seen firm in the months ahead, strengthening cotton prices in the international market are likely to offset that impact, resulting in a stable balance of payments situation.
Global cotton prices are still flirting with record highs on fears that world demand - led by China - will outstrip the supply.
Demand in China is forecast to outpace supply by 17 million bales in the year ending July 31, 2011 according to the U.S. Department of Agriculture reported by the foreign news agency, Bloomberg. Stockpiles in the U.S., the worlds biggest supplier, will decline to a 14-year low for the year ending July 31, the USDA said.
These trends, coupled with growth in remittances and the inflows of from the Coalition Support Fund (CSF) receipts - that is seen materialising in the second half of this fiscal year - could help result in a remarkably better-than-expected external gap.
The SBP last expected the full-year current account deficit to hover around 3.5 percent of the GDP. However, given the current account gap of only 0.7~0.8 percent in the first five months, as against 2.5 percent in the year-ago period, the full-year number might rest around 2 percent.
But to say that these numbers paint a rather sanguine picture would be an overly simplistic view, because slowing import growth is in fact a symptom of a major economic disease: a relatively inactive private sector. So, if and when private sector demand picks up, the financing of the external account could prove to be troublesome.

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Pakistan 5MFY11 BoP Summary

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$ (mn)                        5MFY11    5MFY10       Y/Y

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Current account balance         -504     -1822   -72.34%

Goods: Exports f.o.b           9,034     7,699    17.34%

Goods: Imports f.o.b          13,563    12,435     9.07%

Trade Balance                 -4,529    -4,736    -4.37%

Balance on Goods & Services   -5,554    -5,994    -7.34%

Current Transfers.: Credit     6,359     5,381    18.18%

Remittances                    4,428     3,832    15.55%

Capital Account                   43        86   -50.00%

Financial Account                462      2150   -78.51%

Foreign Direct Investment        574       731   -21.48%

Foreign Portfolio Investment     173       312   -44.55%

Equity Securities                178       318   -44.03%

Debt Securities                   -5        -6   -16.67%

Other investment assets         -541      -309    75.08%

Other investment liabilities     271      1481   -81.70%

Overall balance                  105       943   -88.87%

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Source: State Bank of Pakistan