Current account breather too vulnerable

The current account posted a deficit of $89 million in August 2011 compared with $100 million a month earlier. This narrow down of 11 percent is primarily driven by rising foreign inflows. One of the key factors affecting the current account balance is workers remittances, which have continued the regular upward trend and have tallied a monthly average of $1,203 million for the first two months of FY12. Although the improvement in the current account figures owes to this rise, there is no credible data to breakdown the source of these hefty remittances because of which one cannot be certain about its ability to have favourable impacts on the current account balance in the future. The US-Pakistan relationship has been in a downward spiral since last year and if this trend continues it could impact the flow of Coalition Support Fund (CSF) which has provided much-needed support to Pakistans current account, of late. Despite the decline in the CSF, services credit stood at $760 million after the first two months of FY12 compared with $615 million in the same period last year. Exports at the start of the FY12 have continued to grow, rising from $3.47 billion in August 2010 to $4.26 billion in August 2011. However, Pakistans strong oil demand, the prices of which have been rising internationally and softened prices for its main cash crop, cotton; have affected Pakistans current account balance that showed a deficit of $189 million in the first two months of FY12. At the same time, however, imports have experienced a faster growth and stand at $6.69 billion at present. This has led to a deficit in the trade balance of $2.44 billion in August 2011, compared with a deficit of $2.39 billion in the same period, last year. The month-on-month improvement in the current account balance for FY12 is not much. Values for the current account have a direct impact on the Balance of Payments. According to analysts, there may be pressures on the currency to be devalued. Things may improve, however, if Pakistan is successful in getting grants in currency swaps with China. Without the support of the IMF, which not only provides monetary relief but also acts as an auditor for other donors like Asian Development Bank (ADB) and the World Bank (WB); it seems likely that Pakistan will have to be ready to face serious challenges going forward. Based on the current data and trend, future outlook for the current account balance doesn seem uncertain. Unless Pakistan is successful in finalising the deal with China on currency swaps, and is able to find reliable sources (unlike worker remittances) to improve the current account figures, the BoP is going to face serious pressures in FY12.

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Pakistans current account balance - key items
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($ mn)                   Jul-Aug FY12   Chg Y/Y   Aug FY12   Chg M/M
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Current account balance       (189)                    (89)
Goods: exports               4,252       23%         2,131        0%
Goods: imports               6,689       14%         3,518       11%
Trade balance               (2,437)       2%        (1,387)      32%
Workers remittances         2,407       40%         1,310       19%
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Source: SBP