C/A descends deep into red

It appears that Pakistan’s external account situation is getting grimmer with the passing months. Thanks to a hefty, $596 million current account deficit for the month of February; the overall current account deficit stood at $700 million for the eight months ending February 2013, SBP’s latest statistics show.
The CA woes in the month of February are explained by month-on-month drops in key earning items like exports (nearly 10 percent) and remittances (5.7 percent), along with an 80 percent jump in interest payments on foreign loans.
However, the trade balance for goods (freight on board) shows a healthy, 7.4 percent decline on a year-on-year basis for the period July-February 2012-13. The SBP data, which records Pakistan’s foreign trade statistics based on payments received or made, shows that the YoY drop in 8MFY13 trade deficit is due to imports falling more (3.5 percent) than the country’s exports did (0.9 percent) during this period.
The February decline in remittances over January is a cause of concern – but thankfully, the monthly figure is still above a billion dollars. Encouragingly, the 8MFY13 remittance total is 7.47 percent (or $642 million) more than received same period the previous year. The external accounts of the country have become increasingly dependent on this avenue, whose growth in subsequent months is crucial.
With little reprieve on the CA front, the Financial Account threw up a surprise with a surplus in February three times as much the previous month, due in part to greater banking sector inflows. While the portfolio investments showed a 233 percent growth over previous month, the FDI component of foreign investment saw another month of outflows.
It’s a familiar story why the FA account for the period Jul-Feb is still in deficit this fiscal year, compared to a sizable surplus during same period last year. The positivity in the portfolio investment has been somewhat nullified by the 10 percent dip in FDI YoY. Foreign inflows from other sources, including bilateral and multilateral financial inflows, have also been harder to come by this year.
February culminated in the same amount of balance of payment shortfall as in January: $191 million. The overall BoP for the eight-month period came out to be negative $923 million, which is almost a third of what it was in the corresponding period last fiscal. That shouldn’t be a cause for joy, as the windfall CSF payments received in 1HFY13 differentiate the external sector performance this year from previous year.
Meanwhile, the foreign exchange reserves of the central bank are getting consumed as the country keeps its repayment obligations to the IMF, resulting from a Standby Arrangement that was put in place in late 2008. As of March 8, the SBP’s liquid forex reserves had come down to $7.65 billion, which are nearly 10 percent lower than the level seen on February 8.
More repayments are scheduled to be made in the near future. As per the IMF’s schedule of Pakistan’s SBA repayments, Pakistan will retire some $144.4 million on March 28, followed by another $107.07 million on April 1 (based on March 15 SDR valuations by the IMF). More, heavy repayments are to follow in May and June before the ongoing fiscal year closes.
As the country is heading into the election cycle, it is important to not lose sight of the potential deterioration in the external accounts in next few months when Pakistan will likely have to shore up its forex reserves to keep an adequate import cover. As the next government is going to take its time to establish and adjust itself (which may be somewhere in late May or early June), the onus of responsibility falls on the caretaker government at the centre to come up with a contingency plan for the interim period, which may include a timely recourse to the Fund.

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Key items: Balance of Payments

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(million $)                 Feb. FY13    8MFY13    8MFY12

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Current account balance         (596)     (700)   (3,235)

Exports                         1,920    16,047    16,195

Imports                         3,156    26,217    27,176

Workers Remittances             1,028     9,235     8,593

Financial account                 357     (167)       561

Direct investments               (14)       505       559

Portfolio investments              30       163     (148)

Overall Balance                 (191)     (923)   (2,627)

Net Liquid Reserves with SBP    7,945     7,945    11,962

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Source: SBP