Dwindling balance of payments

Pakistans external balance sheet is not showing a rosy picture. The deterioration of all the accounts of the balance of payments reflects the lack of economic resilience. The BoP which showed a surplus of $88 million in the 1QFY11 stood at negative $759 million in the first quarter of FY12. The current account deficit increased from 1.1 percent of GDP in 1QFY11 to 2 percent in 1QFY12. The deficit in BoP is slowly but surely eating fragile foreign reserves. The CAD increased from $597 million in 1QFY11 to $1209 million in 1QFY12, amongst the biggest contributor was the increase in trade deficit which swelled by 35 percent in 1QFY12 as compared to the same period in the last financial year. The international oil prices on average moved up by 45 percent since 1QFY11 inflating the import bill by 24 percent, whereas export proceeds increased by only 17 percent. Prices of cotton and rice, the major commodities used in export items of Pakistan, experienced a 26 and a 24 percent average increase respectively, providing some support to the trade balance. Current transfers backed by workers remittances came to the rescue, the deficit of goods and services stood at $5411 million. The current account deficit would have been much higher had remittances not provided the cushion. Remittances increased by roughly 25 percent in 1QFY12 pushing the current transfers to $4219 million in 1QFY12, consequently restraining the current account deficit to $1209 million. The dilemma is that remittances have been supporting external balance sheet for some time and still there is not much know-how about the route and channel of remittances. It can be safely deduced that a significant portion of remittances is coming from other heads of current transfers, so the rise in remittances can be due to re-channelizing. The foreign investment continued the downward trend; this decline is reflected in the financial account which was 30 percent lower than the level in the 1QFY11. Direct investment stood at $282 million in 1QFY12 as compared to $395 million in the same period in FY11; its at a multi year low. Same was the case for portfolio investment. There was an outflow $45 million in 1QFY12 as compared to influx of $120 million in 1QFY11 and it is declining further in October. Backed by record high exports and remittances, the financial year 2011 experienced a surplus in BoP. It looks like this surplus would not be sustained as the fall in cotton prices might not be matched by similar dip in crude prices and would inflate the trade deficit: and the cut in interest rate would induce import demand. An overall higher deficit in BoP can be expected this year.

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Summary Balance of Payments
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($ mn)                             Jul - Jun             Jul-Sep
                              FY11*      FY10     FY12*    FY11*
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Current account balance        437    (3,946)   (1,209)    (597)
Goods:  Exports             25,440    19,673     6,141     5,241
Goods:  Imports             35,727    31,209    10,178     8,233
Trade Balance              (10,287)  (11,536)   (4,037)  (2,992)
Services:  Credit            5,473     5,229     1,186       992
Services:  Debit             7,620     6,919     1,882     1,704
Current Transfers :Credit   15,905    12,672     4,219     3,759
Workers Remittances        11,201     8,906     3,297     2,646
FCA Residents                  367       629       (78)      110
Current Transfers :Debit        82       110        17        11
Capital Account,               171       175         7        23
Financial Account            1,878     5,097       483       687
Net Errors and Omissions         7       (60)      (40)     (25)
Overall Balance              2,493     1,266      (759)       88
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Source: SBP