Current account: tame for now

The current account deficit stayed tame in May, thus curtailing the 11-month deficit within one percent of GDP. And this deficit is half of what it was in the corresponding period last year. But that is more of a stroke of luck than an outcome of smart policy framework.
The point of concern is that exports are stagnant at the previous years level in 11 months of this year. The likelihood is that exports of goods in FY13 will remain below the peak levels witnessed in FY11. Business friendly and pro-investment PML-N government shall deliberate some policies to boost exports going forward. But so far, the commerce ministry is vacant in the newly-formed government.
The trade balance slimmed as imports fell marginally in the period under review. Due mostly to five percent lower average oil prices this year and subdued demand attributed to economic slowdown.
Services credit exhibited a handsome growth of over 30 percent to trim the current account deficit. But that northward journey appears unsustainable. The explanation is in the susceptibility on the continuity of Coalition Support Fund that contributed $2 billion this year to date.
But with the US plans of exiting from Afghanistan this year, export services in the form of military units and services may not yield dividends in the upcoming year.
The flagship to the external account is home remittances that kept their persistent growth and are expected to reach $14 billion by the end of this fiscal year.
The worrisome part in the external account is depletion in the financial accounts and that is the chief reason for fast erosion of foreign exchange reserves. The brunt is on the new government on how to entice the foreign investors who are shying away from the country. Some are afraid of poor law and order, while others are daunted by the energy woes.
Foreign investors welcomed PML-N government with an inflow of $465 million in direct investment during May to make the 11 months numbers at $1,319 million (72% YoY). Lets see how this is going to continue.
However, it is imperative to boost FDI inflows to halt the depletion of reserves. SBP reserves are now down to cover just two months of imports and a billion dollar IMF payment is in the offing during this month. The only option to avert going back to IMF is speedy inflows of investment.
But that may be a distant dream and hence going back to IMF for a new programme seems inevitable. All eyes are on the talks with IMF scheduled to commence next week.

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CURRENT A/C BALANCE - KEY ITEMS

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$ (mn)                 May-13    Apr-13   MoM chg   11MFY13   11MFY12   YoY chg

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C/A balance              -346      -354       -2%    -1,952    -3,920      -50%

Trade balance          -1,008    -1,243      -19%   -13,801   -14,157       -3%

Services - credit *       401       407       -1%     6,150     4,602       34%

Remiitances             1,193     1,216       -2%    12,763    12,069        6%

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