Current account, BoP bolster up in August

The external account position of Pakistan looks increasingly comfortable, thanks to a hefty balance of payment surplus ($628 million) in August.
Despite a worsening financial account position, the cumulative BOP surplus for July and August this year owes itself to a handsome current account surplus of 1.24 billion dollars posted in the latter month. This helped sweep away the C/A deficit posted in July, to accumulate a cumulative C/A surplus of 919 million dollars in 2MFY13, compared to a deficit of 261 million dollars same period last year.
The turnaround in August is primarily due to the disbursement of CSF claims from the US, worth 1.18 billion dollars, earlier in August (credited in the Services account). The trade deficit in August narrowed down by 21 percent over previous month to 1.06 billion dollars.
Exports of goods grew by 1.23 percent in August over July, but the 2MFY13 figure still fell short by 200 million dollars relative to last year. Cotton, Pakistans flagship exporting item, suffered last year due to receding prices and volumetric declines. There is some hope that cotton prices may rebound after US Federal Reserves fresh QE push, but the outlook is mostly downhill given the commoditys global surplus.
The current account balance was further supported in August by a 7.69 percent decline in imports over July. Monetarily, Pakistan imported 314 million dollars less in the July-August period this year compared to last year, courtesy relatively smaller oil import bill owing to lower international oil prices.
Workers remittances continue to provide the much-needed cushion to external accounts. Pakistan received a massive amount of 1.259 billion dollars under this head in August, nearly 4.5 percent more than Julys receipts, possibly due to the Eid occasion. There are worries about sustainability of remittances growth, but remittances are actually 2.37 percent higher in 2MFY13 over same period last year.
Its the financial account that is turning out to be really troublesome, burning a hole of nearly half a billion dollars in the otherwise spectacular BOP surplus for August. More worryingly, the financial account balance is in a deficit of 582 million dollars in 2MFY13 compared to a decent enough surplus of 356 million dollars in corresponding period last year.
To highlight some of the weaknesses on this front, the foreign direct investment turned negative in the month of August after a period of continuous declines in recent years. The portfolio investments declined by nearly 46 percent over July, but the July-August figure of Rs74 million still clocks in over 2.5 times the figure reported in 2MFY12.
Despite all this, the overall balance of payments in August improved two times over Julys, bringing the two-month balance out of the red. Meanwhile, SBPs gross reserves firmed up in August by 2.2 percent over July. However, the reserves are down by a colossal 30.51 percent on a year-on-year basis. More repayments to the IMF are due this fiscal, which will pressurise the forex reserves and hence the rupee-dollar parity.
Fresh foreign inflows really matter at this juncture, for strengthening the forex reserves should be the top priority, given the anticipated drop in exports, possibility of higher oil prices, and looming IMF repayments. More CSF reimbursements will be good, but not good enough. The inflows from the 3G license auction and the stalled payments from Etisalat must be materialised soon to stave off a BOP crisis down the road.

===================================================

KEY ITEMS: BALANCE OF PAYMENTS

===================================================

(million $)             Aug FY13    2MFY13   2MFY12

===================================================

Current account balance    1,240      919     (261)

Exports                    2,043    4,061     4,257

Imports                    3,106    6,471     6,785

Services: Credit           1,484    1,808       771

Workers Remittances       1,259    2,464     2,407

Financial account           (498)    (582)      356

Direct investments            (9)      33       100

Portfolio investments         26       74      (47)

Overall Balance              628       20      (28)

SBP gross reserves        11,505   11,505    16,556

---------------------------------------------------

Source: SBP

===================================================