Lessons from the surplus

Even though the economic situation in the country shows a gloomy picture; Pakistan has witnessed a surplus in the current account after seven years, moving from a deficit of $3.946 billion in FY10 to a surplus of $542 million in FY11.
This outcome can be attributed to an increase in the net exports growth rate. Even though there is not much growth in the quantity exported, this increase is a result of the price bonanza in the main export commodities, cotton and rice.
Also, the drought in China in the past worked in favour of Pakistans cotton exports. This led to a substantial growth of 29 percent in exports. On the imports side, low economic growth in Pakistan adversely affected the purchasing power, resulting in less import of crude oil compared to the increase in oil prices. Hence, imports grew by only 14 percent resulting in a favourable change in the BoP.
It is important to understand that the current account surplus, owing to the net export surplus may be short lived. The reason for this is the trend of the forces responsible for the surplus. On one hand, average oil prices have remained high at about $76/bbl for 2HFY11 compared to $70/bbl for the first half of the outgoing fiscal.
On the other hand, cotton prices have receded since January 2011 and even though the textile export increased from $10 billion to $12 billion, it is not enough to ensure sustained surplus in the current account.
The key factor that will determine the future of the current account is workers remittances which have shown an increase of 26 percent in FY11, over the previous year. This increase in reported remittances may be due to number of factors.
These include the efforts taken by the government to transfer the flow of funds from illegal means to legal channels; high interest rates in Pakistan that have attracted capital and increases in remittances due to the migration of human capital abroad as well as the efforts of the Pakistan Remittance Initiative.
However, these factors are mere hypotheses and require extensive research before they can be used for future predictions. Hence, clarity on the future of the current account is still wanting.
Another useful observation is the impact of the Coalition Support Fund on the current account. Pakistan is due to get $1.6 billion in FY12 from the US as reimbursements for war related expenditure. This inflow will be a silver lining on the current account. However, if relations with the US are affected due to geo-political reasons; the growth in services may fall with a negative impact on the current account.
The current account is one constituent of the Balance of Payments. The other component is the capital account; changes in which also have an impact on the overall BOP situation. Hence, it is essential for the policymakers to give due importance to changes in both components while making monetary policy decisions. More on that later.