Forecasting C/A future dicey business

Current account numbers may have surged during the quarter ending December but the deficit remained lower than expectations.
Seasonal increase in oil demand for power generation - owing to water shortage - amid rise in crude prices, which cumulatively pushed oil import bill higher by 23 percent month-on-month, was well absorbed by higher current transfers despite a marginal fall in textile exports.
But for how long. Water shortage, going forward looks imminent in the second half of fiscal year due to lack of snow and rain fall in the mountainous areas and elsewhere as well.
While that may have a negative impact on the food trade balance next year at one end, at the other, it would put some pressure on petroleum imports in the next few months. Thus, the current account would remain under pressure, which may worsen, if global crude prices remain persistently northbound.
Nonetheless, the 14 percent fall in non-oil imports during the first half is a good omen, and this trend is likely to continue in remaining quarters, as machinery imports (17% of total imports) which declined by 24 percent in Jul-Dec period is likely to fall sharply going forward.
The countrys cement industry has gone through massive expansion in the last few years, and is well equipped to cater the demand for a decade. Similarly, with the completion of two fertilizer plants (Engro and Fatima), there isn much in the offing for fertilizer plants and machinery imports in the coming five years or so.
Likewise, after the completion of IPPs currently in the pipeline, by the end of this calendar, amid likely fall in demand owing to substantial increase in power tariffs, machinery imports by energy sector might also slow down.
And while telecom sector has similar tale to tell, it is the textile industry which may continue its replacement process to become more competitive, and therefore might continue to import new machineries. However, this is likely to be offset by the consequent increase in textile exports in the coming years.
As for the short-term, with current account falling by 78 percent in the first half, foreign exchange reserves increased by over $3 billion to $15 billion in the last six months - covering six months of imports. Yet, ironically, the rupee fell by 4 percent in the last six months.
This dichotomy is explained by the gradual but a complete shift in the demand-supply mechanism of foreign exchange payment mechanism through inter-bank market in the last couple of years. Back in 2003-07, virtually all the foreign investment were flowing in the country through the inter-bank market while majority of payments including all oil imports were channeled by State Bank. That strategy helped keep the rupee hovering around 60/USD for long.
But, now in 2010, the entire oil related import payments, including that for defence, war and government machinery is being made by inter-banking system, whereas foreign investment has slid to just a fraction of what it used to be in heydays. The only foreign inflows coming in are IMF or non-IMF bilateral and multilateral aids, grants, or soft-loans, which are predominately routed through central bank and the government channels. So long, PKR.

============================================================

KEY MOVEMENTS IN TRADE

============================================================

Imports ($mn)              Jul-Dec 09     Jul-Dec 08   % Chg

============================================================

Petroleum                     4,640         5,880       -21%

Food                          1,535         2,236       -31%

Machinery                     2,645         3,461       -24%

Agriculture and chemicals     2,739         2,834        -3%

Metal                         1,130         1,230        -8%

Exports ($mn)

Textile                       5,035         5,063        -1%

Food                          1,468         1,662       -12%

Other manufacturing           1,764         1,867        -6%

============================================================