The Murphy’s Law says, ‘if anything can go wont, it will’. That seems to be applying on Pakistan economy; as the numbers are changing from bad to ugly in quick time.
The current account deficit reached a staggering $1.96 billion or 7.9 percent of GDP in Apr18 – only once (Jul 2018) has the CAD been higher since Oct 08. And 2008 was a crisis. Do not forget that oil has crossed $80/bbl in international market after almost four years, and $100/bbl may well happen by 2018 end.
To add to the ado, the SBP foreign reserves fell by $364 million in the week ending May 11. The principal debt repayment (Apr-Jun $3.2bn) and unexpected hike in CAD have eaten up $1.7 billion of reserves, including the influx of $1 billion from China in last week of April.
The goods and services import cover on SBP reserves has came below the psychological barrier of 2 months of imports, at 1.99 month. This number alone should have sent jitters at State Bank and Ministry of Finance.
Icing on the top is core inflation at 7 percent in Apr18 - highest since Oct14. Will these facts be enough to convince the SBP to raise 100 bps in policy statement due in the last week of May? Well, let’s leave the decision to monetary policy committee and SBP research team model; rather focus on the mystery of ten year high CAD in Apr18. Barring two abnormalities in other current transfers in secondary income balance and primary income debit, the CAD would have been around $1.3-1.4 billion.
The impact of $600 million in these two items is crucial in days where every dollar matters. In case of primary income debit, which are interest, profit, dividend and other similar external payments, the fluctuation is a norm. The debit in April stood at $692 million which was $471 million in March and it may come close to average in May. However, $221 million extra gone in April matters; as the reserves are already at critical level.
The mystery not unfolded is that virtually nothing came in other current transfer in April - the toll stood at $342 million in March and only $13 million in April. This head includes usually donations and aid, for the likes of USAID, NGOs and similar finances.
Apart from these, foreign exchange companies who trade in kerb market bring dollars in the economy. These flows are recorded in various heads including other current transfer. The market size is around $10-15 million per day and these companies could have reduced the stash bringing back home in expectation of currency depreciation in near future.
Let us not fall for any conspiracy and hope the slippage in unusual heads of current account are one-offs and a mere coincidence that the anomalies are at a time when the country is in dire need of foreign flows.
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