Current account: the glory might end

Monday, 21 March 2011 11:48

Clocking in at $98 million, the current account deficit during July-February FY11 comes as a breather for Pakistan’s economy in current times. But the thought of future prospects may retard the initial glee.

The months gone by of FY11 have benefited from the favourable impact of higher commodity prices in international markets – in particular cotton and rice, two key export items of the country.

The FAO Rice Price Index surged from 214 points in July 2010 to 252 in February 2011 (a surge of about 18 percent), whereas cotton prices more than doubled to above $2 per pound in international markets by February 2011.

These, therefore, account considerably for the improvement in the country’s goods’ trade balance.

On the import side, even though oil prices had been on an upward trajectory since July 2010, the crucial $100 per barrel mark was crossed in late February 2011; hence it did not dent the import position for July-February FY11 considerably.

Also influencing the current account balance for the first eight months of FY11 were remittances. These increased by over 20 percent on a year-on-year basis, reaching $6.9 billion until February FY11.

A month-on-month comparison reveals that both exports and imports of goods surged relative to January and to December, while remittances improved by 2 percent over January, though they declined by the same percentage over December.

Going forward, cotton prices are believed to be rationalised over the coming months, since it appears to have reached a peak. Cotton futures for May tumbled 2.8 percent last week to $1.99 per pound, due to uncertainty and the consequent flight of skittish investors from the market in the wake of Japan’s calamity.

Analysts are expecting a change of market fundamentals in global cotton markets, especially since farmers are expected to plant a higher acreage of cotton in 2011.

International rice prices, similarly, are also expected to ebb as the latest data revealed by the United States Department of Agriculture depicts ample rice inventories, sufficient even to meet any shortfall in Japan. Besides, local rice exporters are also looking at lower rice exports in FY11 relative to FY10 in quantitative terms due to post-flood crop losses.

As for Pakistan’s import Godzilla – oil – it’s expected to surge even further after the disaster-struck Japan scampers to alternate energy sources after the unfortunate turn of events at its nuclear power plants.

Yet, the resolution of the Raymond Davis case may become a blessing for Pakistan’s current account position, as pending CSF payments and other bilateral inflows are now more likely to pour in. Consequently, the trade-in-services balance may shine out in the remaining four months.

Pakistan’s current account has witnessed some of its best days in the eight months gone by, and that is likely to present a decent overall picture for FY11. The remaining four months, however, will be crucial or as, Khalid Iqbal, Director Research at Invest & Finance Securities pointed, “Oil prices will be critical for the current account balance in the coming months.”