External account relying on remittance growth

Pakistan received record remittances in August 2010; in September it didn break its record but remained high at $922 million - just $11 million shy of the amount received in the month before - taking the quarterly sum to $2.64 billion.
For external account watchers, this is good news; after all, the Pakistan Remittance Initiative, officially launched exactly twelve months ago, is reaping fruits. But aside from remittances, the rest of the external account picture is a bit foggy.
The recently released trade numbers have begun to show signs of stress. Official data shows that the trade gap in the first quarter FY11 shot up by nearly 27 percent to $3.85 billion.
The rise in trade gap has weakened the cushion provided by remittances. Despite the 13 percent year-on-year increase in workers money, remittances as a percentage of trade gap has fallen by some 6 percentage points to 68.6 percent in Jul-Sep FY11 from 74.7 percent in the same period last year.
Though Pakistans overall external account situation is relatively better since the IMF programme, a worsening trade gap could have serious repercussions.
"Although the growth in exports was also projected to increase in FY11, the recent floods and the resulting disruption in productive activity could act as a dampener if the damage to the cotton crop turns out to be extensive. Thus, the expected increase in the external current account deficit, and uncertain foreign inflows could put pressure on SBPs foreign exchange reserves and exchange rate in FY11," the central bank cautioned in its latest monetary policy statement.
Meanwhile, news from international markets isn comforting. On the export front, there are risks of a double-dip recession in the West, Pakistans main export market, whereas on the import front a rebound in global oil prices could cause a further dent.
International oil prices increased 15.8 percent year-on-year to about $82 per barrel as of Monday, and, in the view of Standard Chartered Bank, they could rise further to $93 per barrel by the third quarter of FY11. And since the bulk of Pakistans imports constitute oil, the trade balance remains highly vulnerable.
The billion-dollar question, therefore, is whether, in the absence of strong FDI or aid inflows, remittances will be able to provide the much-needed support to the countrys external account. Looking at the efforts of PRI folks, the answer to that may be a yes, but then again, it aint over till the fat lady sings.