July trade balance: Weaker rupee delivers blow

Depreciation of the local currency worsened the precarious current account situation in the first month of FY13. Data released by the central bank show imports were down in July, compared to last year by 0.73 percent in dollar terms. However the same gap stretched to 8.9 percent in rupee terms. Similarly on the export front, while a comparison of the outgoing months tally of 2.057 billion dollars over last July in dollar terms shows a decline of 4.6 percent; the same comparison shows a net increase of 4.6 percent in rupee terms. Simply put, as the Pakistani rupee lost major ground against the US dollar towards the end of FY12, dearer imports have become dearer even as international commodity prices remain range bound. Textile exports continued to stagnate as international cotton prices appear to have bottomed out in recent weeks. International cotton prices had peaked in April 2011, after which the same fell by as much as 30 percent in the outgoing fiscal. Consequently, textile exports in the first month of this fiscal tallied just 1.091 billion dollars; down by about two percent compared to 1MFY12. However it is encouraging that within the textile group, exports of raw cotton have dropped significantly (87 percent), while exports of cotton yarn have jumped by 40 percent over the same period. This trend suggests exporters that had relied on the commodity price boom are graduating towards processed cotton. Analysts expect textile exports to trend up the value chain in the remainder of the year. Cotton prices are also expected to find ample support at current international rates. Food exports were down last month by a whopping 28 percent over 1MFY12, to stand at 278 million dollars; attributable largely to diminished rice prices as well as lower quantities of food exports. Slight increases in exports of other items were not sufficient to fill the chasm left by declines in the countrys major exports. The import bill saw reductions on account of the agriculture and chemicals group; 31 percent decline over July FY12, as well as textiles that were down 18 percent over the same period to stand at 198 million dollars. But the rising oil bill reigned supreme, clocking in an increase of 13.8 percent over 1MFY12. Within this head, imports of petroleum products jumped by 24 percent, over the same period to reach 1.35 billion dollars. Meanwhile imports of crude dropped by 7.4 percent, drawing attention to the refineries subdued refining capacity due to persistent circular debt. Given that global economic growth is only sputtering along and demand for oil is also subdued, relatively low oil prices may couple with firmer cotton prices to bolster the trade balance in this fiscal. But improved supply of electricity to local manufacturers and fast track development of regional trade pacts will be crucial for any significant and sustainable improvement in the countrys international trade prospects in FY13 and beyond.