Alarm bells ringing in the external account

Of all the economic indicators under critical observation, the current account seems to be the most prominent one in ringing warning bells for Pakistan. Rounding up at 2.6 billion dollars during July-January FY12, against 96 million dollars during the same period last year, the current account deficit worsened evidently. Much of the deterioration of the current account came at the heels of a dwindling trade balance, which shrunk by a massive 2.5 billion dollars during 7MFY12 relative to the same period last year, netting at a trade deficit of nearly nine billion dollars for the period. On a year-on-year basis, exports improved marginally by around seven percent during 7MFY12, while imports surged considerably more by nearly 18 percent during the same period. A month-on-month comparison further shows a decline in exports in January FY12 against December FY12, indicating that a slump in exports in the coming months might be on the cards. The decline in international cotton prices near the beginning of this fiscal year, and the delayed impact on prices of value-added products explains much of the movement in the countrys net exports. International cotton prices began declining towards the beginning of this fiscal year, while latest FBS trade statistics for 1HFY12 showed that prices for value-added products such as bed-wear, knitwear and towels also started decreasing during December FY12. This indicates that the second half of FY12 is likely to stay lackluster as far as exports are concerned. On the imports side, political strains between Iran and the US have put an upward pressure on oil prices, explaining the year-on-year increase during 7MFY12, as well as during January FY12 alone. In fact, oil prices are expected to stay on the higher side with recent news regarding Iran having stopped oil sales to British and French companies, and further news regarding some recovery in Greece with stronger likelihood of the country being bailed out by the EU. Though the year-on-year increase of 22 percent in workers remittances offers some breather to the current account, it is not enough to mask the concerns emanating from the trade side. The financial account, on the other hand, continues with its saga of dismal outflows. FDI dropped by a colossal 40 percent in 7MFY12 on a year-on-year basis, while net equity outflows of nearly 150 million dollars as opposed to inflows of 300 million dollars in 7MFY11, only rendered the scenario further worse. Without the backing for the current account deficit from sufficient inflows on the financial account, the pressure on SBPs reserves was more than obvious. Reserves were down by a massive 1.5 billion dollars during 7MFY12 relative to the same period last year, while the decrease in January alone, vis-à-vis December 2011 was over dollars 0.5 billion. With IMF repayments beginning from February this year, the pressure on the central banks reserves is anybodys guess. Starting February 24, the first installment of 400 million dollars will start the depletion of SBPs reserves, raising serious concerns regarding the sustainability of the countrys balance of payments. Needless to say, the impact on a depreciating rupee will be hard to ignore. Only a miraculous surge in exports, surprising FDI inflows, or an unexpected slump in oil prices and the import bill can save the Pakistans economic managers from the imminent distress over the countrys external account. But the chances of these happening are too slim and too good to be true.

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Key items, balance of payments - Jan FY12
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                                              Jul-Jan
(million $)              Jan FY12   Dec FY12     FY12     FY11
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Current account balance      -305       -14    -2,633      -96
Exports                     1,975     2,058    14,100   13,150
Imports                     3,267     3,229    23,157   19,681
Workers remittances        1,111     1,085     7,436    6,118
Financial account            -159       -71       149    1,372
Direct investments             65       112       597    1,002
Portfolio investments          -3       -29      -146      235
SBP gross reserves         13,914    14,451    13,914   15,419
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Source: SBP