Balance of payments - searching for a ray of hope

Now that the global economy is inching towards a recession again, including emerging economies like India and China, Pakistans external account should be running for its life. The latest data released by the SBP uptil May 2012 doesn show any signs of respite, pointing out the gravity of the situation. In fact, the current account deficit has worsened by more than 50 percent on a month-on-month basis, clocking in at over $400 million during May. The 11-month tally of July-May FY12 has come to $3.8 billion, and it seems likely that the $4 billion current account deficit mark will be crossed by the end of FY12. A glance at this years trade balance will make anyone realise what the source of this deficit is. During July-May FY12, net exports actually decreased vis-à-vis the same period of last year, while the 13 percent year-on-year increase in imports is nothing worth writing home about. The nearly flat increase in exports comes at the back of slumping international raw cotton prices, which have also affected the prices of value-added textile products after a lag. But the decrease in value-added textile exports in terms of volumes is the real troublemaker. As for imports, oil has been the main culprit, with the SBPs latest monetary policy reiterating, "Almost one third of Pakistans total import bill is due to oil payments". Going forward, the global slowdown has meant a southward turn for the prices of most commodities. While this may bode well for the imports as oil prices recede, this also means a lower price tag for some commodities exports such as rice and cotton. At the same time, eurozone troubles and an overall global economic slowdown also means that demand for Pakistani exports will be affected. The trade balance will likely continue to keep economic managers at the edge of their seats in the days to come. At times like these, any source of inflow is gratefully welcomed, and CSF payments are not different. The sad part, however, is that the fate of the receipt of these payments has been put in limbo, thanks to the ongoing controversy over the resumption of NATO supply routes to Afghanistan and consequently stressful US-Pak relations. In this scenario, remittances become the only saving grace for the current account, registering a 20 percent year-on-year increase. But check this out: in FY11, at $10 billion during July-May, workers remittances exceeded the trade deficit, whereas in FY12, workers remittances were nearly $2 billion below the trade deficit for the same period. After all, theres so much one can expect a single sub-head to do as far as improving the current account situation is concerned. On the capital account side, meanwhile, financial inflows were down 20 percent during 11MFY12 on a year-on-year basis. To nobodys surprise, foreign direct investments had nearly halved during the 11-month period in FY12 versus FY11, while portfolio investments showed net outflows instead of inflows as per the same analogy. Interestingly, April and May had seen a lot of foreign buying in FY12. $21 billion and $36 billion worth of shares were purchased by foreigners during the two months, respectively, buoyed by the clarity on CGT rules which was anticipated from the FY13 Finance Bill. Before heaving a sigh of relief, however, note that in June alone, so far, a whopping $93 billion have been withdrawn by foreign investors in the market, most likely a spillover of the volatility and lack of confidence in global equity markets in general.The strain of this external account scenario was evidently reflected in the Central Banks reserves position that has already been under pressure form the IMF SBA repayments. In March alone, $400 million had been repaid to the IMF, with SBPs gross reserves falling by a magnanimous $880 million in May relative to April. Another $110 is to be paid towards the end of June. Given the decline in reserves during 11MFY12 by $3 billion relative to the same period of last year, and a further repayment round the corner, that the decrease in reserves by the end of FY12 will be close to the trade deficit is indeed a cause for concern. The pressure will inevitably fall on the Rupee-Dollar exchange rate which has already worsened by over 9 percent since the start of this fiscal year. Overall, the external accounts are likely to continue to leave economic managers knitting their brows in the days to come, unless, a surprising surge in exports or another IMF SBA arrangement can be helped.