Is the trend in external gap reversing?

The countrys current account surplus, the hallmark of FY11, is under stress again. After recording a surplus of $630 million in April, the current account posted a deficit of $457 million in May 2011.
As a result, although the current account balance is still showing a positive balance of $205 million in 11MFY11, the surplus has deteriorated to 0.11 percent of GDP in Jul-May FY11 from 0.38 percent in Jul-Apr FY11.
The return of the current account deficit in May 2011 has its roots in month-on-month decline in export proceeds and the rising import bill. Interest payments on foreign loans also spiked during the outgoing month.
Textile exports have shown little change, although the proceeds of raw cotton, cotton yarn and knitwear were lower in May vis-à-vis April. The double-digit month-on-month decline in overseas sales is primarily because of a 17 percent fall in the export value of food items, especially rice and wheat.
The month-on-month increase in import bill is largely due to higher imports of crude oil and POL products. In the absence of volumetric data from FBS, higher oil prices can be considered as one major reason.
May 2011 was also the month when workers remittances crossed the $10 billion mark. Rising inward remittances, like always, helped shore up foreign exchange reserves to offset the deteriorated trade balance. The Pakistan Remittance Initiative (PRI) scheme seems to bode well in this regard.
The year-on-year comparison reveals the current account balance had a surplus of $205 million (0.1% of GDP) in 11MFY11, compared to a deficit of $3.4 billion (2.1% of GDP) in 11MFY10. This remarkable turnaround is led by the impressive growth in exports and workers remittances in 11MFY11.
The price-led surge in exports is rooted in 21 percent year-on-year growth in food exports - led by fruits, vegetables, wheat and meat - and a 27 percent increase in textile group exports. Small yet strategic gains - in exports of sports and surgical goods, petroleum and chemical products, leather manufactures, gems and jewelry items - have also contributed to rising exports.
Petroleum group imports on the other hand, grew by 17 percent, while food group imports also rose by a hefty 54 percent in 11MFY11.
The current account figures for May 2011 though reflect that the trend is reversing and can be expected to show a negative trend going forward. The 11MFY11 current account surplus is largely attributable to the Coalition Support Fund (CSF) reimbursements in December 2010, lower oil imports in the months leading up to April 2011, and higher cotton and rice prices for most part of the current year.
After the recent OPEC failure, various energy bodies and associations forecast that oil prices are likely to stay above $100 a barrel during CY11. This means that Pakistans oil imports are going to rise in the future, not least because of the ongoing domestic petroleum shortage owing to refineries capacity issues. Domestic economic recovery, if any, will likely cause a hike in the oil import bill.
Handsome growth in the exports of the textile group has been associated with soaring international cotton prices. Having peaked out in March earlier this year, commoditys prices can now be expected to follow a downward trend. This will significantly dent the countrys export growth in the future.
After the May 2 incident and resulting uproar on Capitol Hill, it seems that it may be a while before Pakistans government gets further reimbursements under the CSF. The US has disbursed $745 million under this head thus far in FY11. In April, the finance Minister said that Pakistan would receive around $500 to $600 million from CSF before June 30, 2011. There are little signs of that happening anytime soon. Delays would hurt!
While remittances continue to provide the much-needed cushion to the countrys foreign reserves, there are concerns that they will wither out if push comes to shove. Question marks are being raised over sustainability of the recent years surge in remittances and there is a concern that amid rising remittance inflows, the policymakers may not worry much about export diversification and value addition.

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Pakistans current account balance - key items

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($ mn)                    Jul-May    Chg      May     Chg

                             FY11    Y/Y     FY11     M/M

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Current account balance       205   106%     -457   -173%

Goods: exports             22,781    27%    2,255    -13%

Goods: imports             32,166    14%    3,275     13%

Trade balance              -9,385     8%   -1,020   -223%

Workers remittances       10,096    25%    1,050      2%

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Source: SBP

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