Mixed news on the external sector

In its second quarterly report on the state of Pakistan’s Economy released over the weekend, the State Bank of Pakistan has presented a candid assessment of the external sector performance for the six month period ending December 31, 2012. While the improvements on some counts are now consigned to historical data, the deterioration is going to pose significant challenges in the months ahead.
The Report highlights that during 1HFY13, the overall balance of payments recorded a deficit of $0.5 billion, which is much lower than the deficit of $1.8 billion posted same period of last year. That was made possible due to a $0.22 billion current account surplus during the period, due in large part to the windfall CSF payments ($1.8 billion), strengthened by the growth in remittances and contraction n trade deficit.
According to SBP figures, the trade deficit shrank by 3.6 percent YoY, major due to a 1.6 percent dip in imports on the back of falling commodity prices, notes the report. However, based on the Pakistan Bureau of Statistics’ data (which records data based on shipments as opposed to dollar proceeds received), the trade deficit declined by 13.9 percent yoy; owing to a 7.5 percent rise in exports and 3.3 percent drop in imports.
The SBP Report uses the PBS data to analyse the foreign trade profile during the half-yearly period. “While a slowdown in global commodity prices and better production of intermediate goods reduced the import bill, an extraordinary increase in the gold price differential and award of GSP status to Pakistan by the EU, boosted jewelry and textile exports,” the report noted.
On the imports front, the report highlights YoY declines in import categories of food, transport, textile and agriculture, while there is growth in machinery, oil and metal imports. “Food played the dominant part in reducing the country’s import bill largely due to the decline in spices, palm oil and sugar imports.”
However, the impact of improvement in current account in 1HFY13 is largely subdued in the face of dwindling capital and financial account balances. These two accounts, which are relied on as financiers of current account deficits, posted a deficit of $0.51 billion during the period under review (surplus of $0.37 billion in 1HFY12), marking the first time they recorded a deficit since FY08.
The central bank attributes that to the slump in government’s borrowings from the International Financial Institutions, which couldn’t be offset by improving but still-low foreign investment figures. The foreign direct investment increased by 6 percent to reach $0.56 billion in 1HFY13, of which $140 million went to the financial sector. However, the telecom sector is said to continue recording outflows.
The report notes that despite improving external account position compared to same period last year, the foreign exchange position remained vulnerable, losing $1.4 billion in those six months, due to the repayments to the IMF. “The adverse impact of this decline is reflected in Rupee Dollar exchange rate, which depreciated by 2.6 percent against the US dollar during H1-FY13,” it said.
Consequently, the reserve adequacy ratio reduced from 19.9 weeks of imports in June 2012 to 18.1 weeks of imports in December 2012.
The central bank has categorically stated that it is the declining foreign exchange reserves that are affecting the market sentiments, rather than the scale of the current account deficit. However, it is confident that its reserves would be sufficient to meet the country’s scheduled repayment and other forex obligations.