Current Account: surplus withering away

Pressure seems to be mounting on Pakistans external accounts. Latest data released by the State Bank of Pakistan (SBP) shows that during the seven-month period ending January 2013, the Current Account (AC) balance surplus had come down to $62 million.
No surprises there, as the hitherto sizable CA surplus was expected to shrink in early second half, to later plunge into deficit, as financial outflows go on outnumbering weak inflows.
The 7MFY13 surplus looks fine compared to a whopping deficit of $2.8 billion same period last year, but that has primarily been due to the Coalition Support Fund (CSF) payments of nearly $1.9 billion received from the US in 1HFY13. That provided some relief to the external accounts when other foreign inflows had dried up.
Supporting the CA surplus is the gradual reduction in the trade deficit, which is another positive highlight of this seven-month period. Thanks to one percent growth in exports and two percent decline in imports, the trade deficit reduced by 6.8 percent YoY to come down to $8.7 billion in 7MFY13. A similar pattern is visible for the month of January, during which the monthly trade balance improved by almost 20 percent.
Workers remittances continue to provide a cushion to the Countrys foreign exchange reserves and its CA balance. During 7MFY13, remittances scored a double-digit growth of 10.36 percent YoY. The January tally was lower than the average monthly figure during this period, which may raise some concerns. However, analysts expect a revival in month-on-month remittance growth momentum in the near term.
While things are not too shabby on the CA front yet, its future deficit financier, the Financial Account has remained in an awful shape, right since it incurred large deficits in the second quarter this fiscal. Compared to a tidy surplus last year, the FA recorded a deficit of $739 million in 7MFY13.
While foreign portfolio investments have perked up this fiscal due to increased activity on the KSE, the FDI inflows have declined by 11.6 percent YoY. The oft-repeated factors behind lackluster FDI inflows, like the security situation and the utilities crises, will not go away in the short-term, so FY13 may turn out to be another disappointing year. However, from FY14 onwards, there could be a resurrection in investor confidence after a new government takes charge and does something about these issues.
The deterioration in the FA is also compounded by a gradual slump in bilateral and multilateral financial inflows in the forms of project aid, programme loans, grants, etc. Banking sector outflows from the Country (e.g. to settle outstanding banking liabilities, to build and maintain banking-related investment assets abroad) have also been higher relative to last year, hence making the FA hemorrhage more severe.
The overall Balance of Payment (BoP) in 7MFY13 showed a 69 percent improvement over the previous year, thanks to the CA surplus, but the BoP is still entangled in a large deficit of $732 million. With the CA likely to plunge into red zone soon, the foreign exchange reserves and the value of the Rupee are almost certain to come under more pressure, due to the double whammy of IMF repayments and inadequate financial inflows.
The liquid forex reserves available with the SBP stood at $8.45 billion as of February 8, which are more than sufficient to meet the repayments. However, the real test of the economic managers will be to keep the markets calm when the depleting forex reserves gradually reduce the import cover. In the absence of fresh financial inflows, an IMF programme seems inevitable, perhaps the only way to replenish with an adequate amount of reserves.
It is important to also keep an eye on the trade balance situation. The export growth has been sluggish during this period, and in order to close FY13 on a decent export growth rate, adequate power supply to the major exporting industries, especially textiles and other value-added sectors, will have to be ensured.
The decline in imports during the period is said to be largely due to controlled prices of commodities such as crude oil. As it experiences gradual erosion in its forex reserves, a spike in oil prices is the last thing Pakistan needs.

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Key items: Balance of Payments

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(million $)                  Jan FY13      7MFY13      7MFY12

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Current account balance         (156)         62      (2,792)

Exports                        2,159      14,170       14,045

Imports                        3,281      22,944       23,463

Workers Remittances           1,090       8,207        7,436

Financial account                (86)       (739)         327

Direct investments               (38)        525          594

Portfolio investments              9         133        (163)

Overall Balance                 (191)       (732)     (2,366)

SBP gross reserves             9,873       9,873       13,914

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Source: SBP