Ballooning BoP

With the current account deficit yawning nearly 50 percent over the last year, it appears that another BoP storm is brewing. Though currently at a not-so-threatening distance, the situation could turn uncomfortable if the events turn out to be as bad as currently feared.
Despite a sizable growth in exports in the first two months of the current fiscal year, the balance of trade worsened by 16 percent year-on-year as the growth in imports equalled that in exports. Though the trade balance has recovered on a month-on-month basis, the scope of further recovery seems limited given the damage to the farming sector caused by floods.
Trade balance can widen even more "if textile exports show the effects of weak recoveries in the US and EU, which account for (nearly) 50 percent of total exports," analysts at Roubini Global Economics cautioned earlier this fiscal year.
Thankfully, the aid inflows, coupled with strengthening remittances stream on account of post-flood rehabilitation, may provide a cushion. But thats a big may, considering the aid-fatigue that has become visible in the wake of calls, by foreign media and donors alike, to ensure fiscal reforms and eliminate corruption before money is doled out to Pakistan.
Remittances, therefore, should be the countrys mainstay to support the balance-of-payments account.
At the moment, the positive effects of the PRI scheme launched last year are giving the much-needed breathing space - one that will likely continue for another two to three months as the relatives of the flood-affected people send money for life support and reconstruction purposes. Remittances might also stay uppish on account of the upcoming Eid-ul-Azha.
Then again, workers remittances cannot continue to increase forever; even if they do, they can only do so much in the face of falling FDIs and apparent difficulties in raising external financing on the part of the government. For BoP managers, these are enough reasons to be worried.

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KEY ELEMENTS OF BALANCE OF PAYMENTS

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($ mn)                      2MFY11        Y/Y        Aug-10        M/M

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Current account balance        944        49%          324        -48%

Goods: Exports f.o.b         3,471        15%        1,811          9%

Goods: Imports f.o.b         5,743        15%        2,826         -3%

Trade Balance                2,272        16%        1,015        -19%

Balance on Goods & Services  2,839        16%        1,311        -14%

Current Transfers Credit     2,306        1%         1,174          4%

Remittances                  1,724        13%          933         18%

Capital Account                  3       -89%            3          na

Financial Account              141       -93%          123       -147%

Foreign Direct Investment      172       -50%           70        -31%

Foreign Portfolio Investment    96        57%           48          0%

Equity Securities               90        -1%           48         14%

Debt Securities                  6      -120%            -       -100%

Overall balance                786      -166%          452         35%

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Source: SBP