At a time when foreign exchange reserves are falling and the local currency is depreciating, the only silver lining seems to be coming from the Balance of Payments. The fiscal year ended June 2013 registered a current account deficit of mere 0.9 percent of GDP vis-à-vis two percent last year.
The improved current account position is attributed to lower imports (which declined by two percent YoY) and 31 percent growth in the services credits, thanks to reimbursement of Coalition Support Fund.
On the flip side, exports stagnated as did growth in remittances. Remittances that were swiftly growing at annual rate of 20 percent for past many years grew by mere six percent last year, implying that perhaps the juice of the PRI Initiative has been fully extracted.
The financial account was marginally in red this time as compared to an inflow of $1280 million in the previous year. This is despite some recovery in the foreign direct investment which grew by 70 percent to $1447 million. With PML-N business friendly government, there is some hope of revival in foreign direct investment.
By virtue of both current account and financial account being negative, liquid forex reserves of SBP fell by nearly $5 billion last year to stand at $6 billion - covering mere 54 days of imports. The picture at the end of last year was much better as we had a cover of almost 100 days of imports despite higher current account deficit.
The message from the data is very clear: without any betterment in the financial accounts, the BoP vulnerability will stay. And that is the chief reason for sharp rupee depreciation and for going back to the IMF for a fresh facility.
There is a history of Pakistani rupee adjusting against the green back as and when we enter into a new IMF programme. It happened in 1998, 2008 and 2009. The same might be the case in 2013. Bear in mind that lately the gap between the open market and the curb market widened to alarming levels. It increased to over Rs3 per USD.
There might be some speculation in the open market and it could have overreacted while the adjustment in the inter-bank market is based on real demand and supply. Nonetheless that gap is no good to the overall Balance of Payments picture, as this may deter the remittances coming through the PRI Initiative, and people may revert to Hundi and Hawala system for sending money home.
That is not a good sign as remittances remained most promising amongst all the heads of current account. The central bank ought to do something to narrow this gap; left unchecked and the likely outcome would be that the interbank market rates converges to the open market rates. In other words, further rupee depreciation in the inter-bank market may be on the cards.
Key BoP items
Current a/c bal -2,299 -4,658
Trade deficit -15,056 -15,765
Remittances 13,920 13,186
Financial a/c balance -80 1,280
FDI 1,447 821
Net liquid reserve with SBP 6,008 10,803