Current account vulnerable again

The worsening of the current account balance in the month of November has plunged the five-month balance into negative - thanks to subdued export growth, remittance slowdown and interest repayments to the IMF during the month.
The five-month current account deficit, however, is significantly lower than same period last year. This could be traced back to the windfall CSF payment ($1.18 billion received in August), which was supported by factors of reduced trade deficits and remittance growth seen in earlier months this fiscal.
The exports of goods (f.o.b.) fell in November on month-on-month basis by 10 percent, which is being attributed, in part, to deliberate delay in payment receipts by the textile exporters due to rupee depreciation expectations. Imports registered a month-on-month decline of 6.6 percent, despite a suspected uptick in oil import bill owing to winter season demand.
The upcoming release of detailed data will shed more light on the reasons behind these trade trends. The 5MFY13 trade balance improved by 268 million dollars YoY - thanks to a two percent export growth and a 41bps import contraction relative to same period last year.
Perhaps its a bit too soon to raise red flags, but workers remittances showed a month-on-month decline of over 25 percent in November. Deterioration here directly leads to worsening of the CA deficit. Analysts are assigning this drop to higher proceeds received in October owing to Eid-ul-Azha. The stellar growth in prior months this fiscal, however, helped remittances score a YoY growth of 14.16 percent in 5MFY13.
November saw some improvement in financial account balance, churning a surplus of $145 million compared to a deficit of $311 million in October. The November financial account position was supported by the banking sectors relatively lower transfers to their nostro accounts abroad and negligible foreign debt repayments.
The onus of financing the countrys CA deficits has largely fallen on the financial account. But the FAs state has remained worrisome due to evaporation of project loans, programme loans, bilateral grants, etc. The 5MFY13 balance is already in deficit compared to a surplus last year. Foreign direct investments are on a secular decline, though portfolio investments have increased YoY as bourses show activity.
The current account deterioration led to a sizable balance of payment deficit of $423 million in November, which swelled the 5MFY13 BOP deficit to almost 900 million dollars. That this figure is half of what was seen at this time last year doesn offer much solace. The central banks reserves declined to $9.8 billion at the end of November, a depletion of over 32 percent over same period last year, and reportedly stood at $8.6 billion as of December 14.
The loan repayments to the IMF have taken their toll, and the Rupee slide is a manifestation of that. According to IMF data, Pakistan is scheduled to retire to the Fund 562.61 million SDRs (or $867.34 million) in the quarter ending March next year, in eight installments. (1SDR=$1.541630, as per December 18 SDR valuations by IMF). More repayments will follow in subsequent quarters.
Pakistan is in dire need of external inflows, to strengthen its reserve position and to arrest the rupee depreciation. Reportedly, CSF inflows worth $688 million are expected by the government to be released by the US later this month - that will provide a major cushion. Progress is evident on that front.
But the forex reserves would still be exposed to danger in the face of IMF repayments if other foreign inflows (e.g. grants and loans) are not secured in time. A declining trade balance - a possibility if oil prices increase in near term and drab exports growth persists - will further add to the external account worries.

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Key items: Balance of Payments

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(million $)              Nov FY13   5MFY13    5MFY12

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Current account balance     (638)    (365)   (2,341)

Exports                     1,993   10,200    10,001

Imports                     3,346   16,595    16,664

Workers Remittances        1,018    5,982     5,240

Financial account             145    (108)       537

Direct investments             62      306       420

Portfolio investments          17      139     (133)

Overall Balance              (423)   (893)   (1,716)

SBP gross reserves          9,881    9,881    14,583

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Source: SBP