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 On the face of it, economic indicators for Pakistan seem to be improving. Inflation was recorded in single digits for the previous month after 24 months, and the Quantum Index Number (QIN) of LSM improved month-on-month by over 4 percent in October FY12. Now, current account numbers for December FY12 have recorded a surplus for the first time this fiscal year. Delving into the details reveals that the improvement for December comes at the heels of an improved trade deficit, thanks to a month-on-month improvement of 7 percent in exports, and a month-on-month fall of about 2.4 percent in imports. Even for 1HFY12, exports grew year-on-year by over 9 percent, though the increase in imports of about 17 percent for 1HFY12 over 1HFY11 explains the worsening of the trade deficit in 1HFY12 relative to the same period last year. Given the critical role of cotton and related products in Pakistans exports, global cotton prices have been a key influence on the net exports of Pakistan. For July-December, the average global cotton price was only marginally greater by about 5 percent in FY11 (121.5 cents per pound) relative to FY12 (115 cents per pound). However, the second half of FY11 saw a sharp increase in cotton prices - which reached up to 200 cents per pound on average -, due to which the current account received a significant boost in 2HFY11. However, with commodity prices receding globally, the second half of FY12 may not have a lot to celebrate and will likely not be as promising as its FY11 counterpart. On the imports side, oil prices are a critical determinant of Pakistans import bill. While imports decreased in December 2011 versus November 2011, the year-on-year increase in the import bill during July-December FY12 was very marked. In 1HFY12, global average oil prices (Brent) were higher by over 36 percent relative to 1HFY11. This plausibly explains the higher import bill for July-December FY12. Going by the same logic, 2QFY12 saw lower oil imports relative to 1QFY12 by about 9 percent, with a reduction in average global Brent prices of about 4 percent in 2QFY12 over 1QFY12. However, given the global political strains with Iran, oil prices are feared to go up even more. If this fear materialises, not much respite to the current account will be offered from the import side either. But while the current account came as breather with a surplus in December, the financial account showed causes for concern. As opposed to an inflow during November FY12, net outflows were seen in the financial account in December FY12. The financial account situation in FY12 against FY11 is so stark that the financial accounts net position was a whopping 90 percent lower in 1HFY12 against the same period last year. Dwindling FDI, receding equity inflows, and outflows from other heads, such as banks, accounted for the slumping financial account. Thus, the improvement in the current account was pretty much offset by the worsening of the capital account. The cause for concern in this scenario becomes more prominent when SBPs gross reserves are seen. Declining by around $130 million in December versus November 2011, and by a whopping $600 million in July-December FY12 versus the same period last year, the decrease in reserves is a hint of prospective crises in case of a further deterioration of the balance of payments. With worsening prospects for imports and exports discussed above, a continuation of improving current account figures seem like a distant dream for this fiscal year. And despite a few positive economic indicators such as those mentioned at the beginning of this piece, a strong perception-based indicator, the countrys foreign exchange rate, is seeing the rupees depreciation against the dollar. While this keeps up fears of any impending balance of payments crisis, it also puts a question that offers much food for thought: is the economic recovery seen in economic indicators deemed to be credible and sustainable? From the looks of it, the recovery only seems fragile at best.

=================================================================
Key items, balance of payments - Nov FY12
=================================================================
                                                      Jul-Dec
(million $)               Dec FY12   Nov FY12      FY12      FY11
=================================================================
Current account balance        160       -688    -2,154         8
Exports                      2,057      1,918    12,124    11,112
Imports                      3,082      3,157    19,743    16,882
Workers remittances         1,085        925     6,325     5,291
Financial account             -282        444        97       979
Direct investments             112         96       532       840
Portfolio investments          -29        -13      -142       233
SBP gross reserves          14,451     14,583    14,451    15,041
=================================================================

Source: SBP

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