The external sector had been stable in the recent past where current account deficit (CAD) was kept in check, thanks to continued flows from international financial institutions, stable exchange rate, and low oil prices. But the balance-of-payment vulnerabilities have started emerging! Though still in surplus, the current accounts balance has shrunk from $236 million surplus in March to $100 million surplus in April.
For the first ten months of the ongoing fiscal year (Jul-Apr FY16), the current account has witnessed a deficit of $1.52 billion (-1 % of GDP), down by 18 percent year-on-year as per SBP's recently released data. However, a look at the trade data shows that the trade balance has worsened slightly to a deficit of $14.5 billion during Jul-Apr FY16 from $14.2 in the same period last year. Export downturn is not news; their share in GDP has decline from 12 percent in 2012 to nine percent in 2015, which will likely dig deeper if IMFâ??s ambitious claims of GDP growth rate are anything to go by.
The textile exports, which still make up for over 50 percent of total exports, continued to spiral down. The just released Monetary Policy Information Compendium for May 2016 shows a decline of 5.7 percent year-on-year in textile group exports for 10MFY16 to $10.6 billion. Three factors that have been contributing to stagnating export and eroding volumes and export revenues are lower cotton prices, falling global demand for textile (especially in China) and artificially overvalued currency (making exports uncompetitive).
On the import side, though the country has been enjoying low oil import bill due to low oil prices for some time now (petroleum imports 10MFY16 at $ 6.4 billion - 39% down YoY), recent revival in crude oil prices have instigated fears of the end of a joyous period. The prices have continued to rally in April 2016 where Arab Light blend has surged by 28.5 percent month-on-month in spite of failure of Doha-Supply-freeze talks.
However, import of machinery- a good omen for economic growth- continued its upwards movement; total machinery imports in Jul-April 2016 as per SBP's compendium increased to almost $5 billion by around eight percent year-on-year. Both power and electrical imports in the 10 months were greater than their aggregates for FY15.
There was a time when remittances were increasing staggeringly, guaranteeing their healthy contribution to the BoP position. However, in the last five to six months, remittances have started running out of momentum. During 10MFY16, home remittances saw a meagre growth of a little over five percent, year-on-year. The point of concern here is the slowing down witnessed post oil price crash. Similar was the growth rate of FDI - a sorry state of affairs - in 10MFY16.
In a nutshell, there are risks for BoP in case of a recovery in crude oil prices; the recent up-tick in crude oil price has made BoP more vulnerable to oil price shock since non-oil imports (particularly machinery) are also climbing. Also, exports are unlikely to recover in the short term in the absence of policy focus, and home remittances have started decelerating, not to mention the panic created by the rising debt payments in FY17 and the recent aid restrictions by the United States.
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