Hidden vices in current account decline

Bravo! With trade deficit continuing to slide, depicting that aggressive monetary tightening and the effects of global economic slowdown are successfully playing their part to curb escalating consumer demand, Novembers current account gap narrowed to its lowest in recent memory.
In part, and the more commendable part, the 81 percent year-on-year reduction in Jul-Nov external gap was supported by 29 percent rise in remittances that have been on a record making spree since the action taken against hawalas and the launch of State Banks PRI scheme targeted to attract homeward bound money through proper banking channel. However, here comes the not so bravo part. The reduction in import expenditures can be ascribed to lower oil prices, down 25 percent year-on-year, which slashed fuel import bill by nearly 36 percent in Jul-Oct, and not lower oil consumption which remained largely intact during the period. Likewise, the government can take the credit for the decrease in food and textile imports, which is mainly due to bumper cotton and wheat crop at home. What is critical is the slowdown in industrial imports that can potentially have a negative impact on future exports and hence future growth. So far, the monetary policy has been successful in reducing demand of imported vehicles, plastic materials etc, which is a good sign. But it also signals slow economic prospects, given the easing demand for machineries used in textile, construction and mining industries (See table).
These numbers come in tandem with the erosion in purchasing power and falling FDI inflows in infrastructure and manufacturing sector - signaling that struggling times lie ahead for exports, which have already declined by 11 percent in the first five months of the current fiscal year.
Given the full-year export target of $18.86 billion for FY10, such lukewarm industrial growth should be the chief concern for policy makers, since manufacturing sector accounts for 80 percent of total exports from Pakistan, according to World Trade Organization. So, the government needs to lure more private and foreign investments in manufacturing sector and formulate strategy to foster imports of machineries that will help strengthen industrial and manufacturing base essential for export growth. It also needs to liaison with industrialists and change the duty structure to boost machinery import that will help in future economic and export growth, while keeping the policy to discourage consumption based imports of finished goods.

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KEY MOVEMENTS IN TRADE

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Imports ($mn)                Jul-Oct 09  Jul-Oct 08   % Chg

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Petroleum                       3,465      5,380       -36%

Road Motor Vehicle                221        322       -31%

Electrical Mach.                  176        283       -38%

Construction & Mining Mach.        21         38       -45%

Textile Mach.                      79        108       -27%

Exports ($mn)

Cotton Cloth & Knitwear         1,346      1,584       -15%

Engineering Goods                 106        139       -24%

Art,Silk & Synthetic Textile      121        147       -18%

Sports Goods                      117        141       -17%

Chemical & Pharma Prod            235        257        -9%

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Source: SBP

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