BoP: bumpy ride and a long way home

The current account like a four wheel drive has so far shown resilience on the bumpy road that is our economy. After beating all forecasts including that of the central bank; it was marginally in the green for the first time in seven years. In the first month of the current fiscal it has virtually hung in the balance - against a deficit of $631 million in July 2010; the deficit amounted to a mere $75 million last month. SBP has forecast that the current account deficit will stand at 0.8 percent of GDP in FY12 in its latest quarterly report. Back in February 2011, the central bank had predicted the same deficit would stand around 1-1.5 percent of GDP in FY11 while the current account actually ended up posting a surplus over the same period. Exports continued to grow by 28 percent in July (YoY), in line with last years speeding despite the sharp fall in prices of cotton as well as prices of textile products. Since the details of exports have not been made public yet, one may speculate that the food group took the lead in growth but there might be some positive surprises in textile exports as well. On the import front, a subdued eight percent growth is telling tales of the impact of monetary tightening and purchasing power erosion despite a fall of 22 percent (YoY) in average oil prices in July, as petroleum products constitute one-third of the oil import bill. Lets not delve too much into the details and wait for comprehensive data before passing verdicts on this front. It is home remittances that are turning heads at the moment as these have crossed the billion dollar mark in July; showing a growth of 40 percent over the corresponding period, last year. But there are many critics that doubt the sustainability of the trend of rising remittances. The interesting fact that might have been missed by many is the increasing share of remittances and FCA residents in current transfer credit. The share of remittances and FCA within current credit has steadily increased from 53 percent in FY07 to 73 percent in FY11. Since no details of the rest of current transfer account have been shared by SBP or other government agencies; one may wonder that the shift of money from some other official channel to remittances can contribute to the latters growth and could be offsetting remittances growth a bit in the overall current account - as worker remittances grew at a CAGR of 19 percent in FY07 to FY11 compared to 11 percent growth in current transfer credit. Interestingly credit transfer growth was at par with remittances in FY11. This raises concerns for analysts and economists over the growth of 26 percent in unknown money which stood at a towering $4 billion last year. So where is this money coming from? And who is financing it? Though the intent here is not to brew conspiracies; legitimate questions do arise from the apparent aversion among the echelons of power, from sharing information with the public. The Coalition Support Fund (SCF) was another buoyant for the current account over the period under review. However disbursements on this front have slowed to a trickle since relations between the US and Pakistan started heading south. Looking at the capital account, FDI flows appear to be in a nose dive, already having plunged to one forth in FY11 compared to their peak in FY07; they fell further in July. Portfolio investment, mainly in equity market, averaged at $476 million in the past two years but was negative in July and may continue to be a strain in the aftermath of the US credit rating downgrade and compounding issues in the Eurozone monetary marriage. All these question marks around the sustainability of the balance of payments have culminated into appreciation of the US dollar against the local currency to the tune of 0.77 percent since the start of this fiscal year despite the fact that the greenback lost strength against all other major currencies of the world. This could place Pakistan in another precarious situation with regards to imported inflation. More on that later.