CAD round-up

The current account downward trend is establishing. The decline is by $1.6 billion in 2MFY20 to $1.3 billion or 2.8 percent of GDP. The trade deficit numbers are more encouraging – down by $2.4 billion in Jul-Aug – import compression is for real – dip of 23 percent to $7.7 billion. Exports are stagnant in value terms, but PBS data of volumes are showing healthy growth – the decline is in subsidized sugar and wheat, and the benefit to be accrued by high sales in rice and cotton value added.

Had the remittances kept their growth, CAD could have been even lower in August. The exuberance of PTI winning election charged up the diaspora last year same time, now wait and see policy is being adopted. In August, flows are low ($1.7 bn) as Eid flows came in Jul ($2.0bn); but for two months, the seasonality is levelled out. The other reason for low flow could be the frictions in incentives given by government to banks in Middle East – which SBP is confident to be resolved –the coming two months’ numbers will make the picture clear.

It was expected that due to curb on smuggling to inch up the remittances – the under invoiced imports bill used to be adjusted against the remittances flow – lowering both official imports and remittances. The last year increase was said to have that impact too. Now some circles in the market are saying that lately government is soft on smuggling to show lower import bill, and that could explain fall in remittances for UAE.

Not much truth seems to be in the theory as import compression is visibly in items that come from formal channels. Such as completely knock down (CKD) in automobile – down by 35 percent; and that is linked to similar fall in automobiles production. Much has been twistedly covered on temporarily closure of Indus Motor plant. The food group import is down by 29 percent in Jul-Aug; and that is visible from lesser imported goods available now in super markets.

Some say that imports ought to come as first phase of CPEC is done; and now less burden on machinery imports. That has already happened in last year – as the subhead was down by 22 percent in FY19. In Jul-Aug the decline is mere 6 percent – surprisingly despite new taxes and all, cell phone imports increased by 26 percent.  The petroleum imports are down by 38 percent and that is mostly due to fall in oil prices by 16 percent. The leading indicator of slowdown is diesel (HSD) in our economy which was down by 31 percent in 2MFY19 and this year the fall is 10 percent so far.

The major criticism naively comes from popular media on no increase in exports despite massive currency devaluation. There was no miracle ever expected in short term as exports growth requires capacity addition in existing avenues and technical innovation in new areas. These things take time. There is some growth in volumes but depressed commodity prices kept the value low. The low commodity prices are overall beneficial for net importing countries like Pakistan.

In textile, apart from cotton yarn, cloth and towels every other main item has shown double digit growth in volumes. The decline in low-value added is due to disruption in value chain – Pakistan half processed goods used to be exported to China from where the valued added goods were destined to developed world. The US China war has limited the potential in that market, but that is giving an opportunity to value added sectors to capitalize the part of China’s market.

In food exports, there is a disparity in PBS and SBP data where the former is showing a growth of 14 percent while SBP is depicting a decline of 1 percent. PBS is based on actual exports and it is showing 40 percent plus volume growth in rice, meat and fish, 30 percent plus growth in fruits and vegetables. Some of the increase is absorbed by depressed prices while the rest is eaten by over 70 percent decline in wheat and sugar exports – these two commodities were cursed as the exports needed fiscal subsidy and growers used to prefer these over competitive products. Now growth in cultivation is higher in cotton and rice over sugarcane – the reason is simple – former trades at international price, while sugar and wheat has support price in PKR.

The encouraging exporting part is a pick in engineering goods – up by 79 percent in value on SBP data. The numbers are small; but they tell a tale. In the past few years, the reverse of import substitution started in engineering sector as domestic goods were simply not competitive to smuggled Chinese – now not only import substitution is taking place in these sectors, the efficient ones are exporting as well.

The need is to find champions within engineering and agriculture, and give them competitive environment by keeping currency at market rates and more importantly not giving undue support to textile – as smart money goes behind returns. The efforts should be on rerouting the money where returns to the economy are at large.