C/A surplus in 1HFY13: don’t read too much into it!

Thanks to a hefty current account surplus in December, the current account showed a quarter billion dollar surplus at the close of the first half of the ongoing fiscal year, compared to a 2.5 billion dollars deficit same period previous year. This huge turnaround was possible due to the two windfall CSF payments (~$1.9 bn) received during 1HFY13, latest one being the $688 million tranche received late December.
To an extent, fundamentals also supported the CA balance. Trade deficit during 1HFY13 stood at $7.61 billion, showing a YoY decline of 3.5 percent – the half-yearly exports went down by a smaller 33bps compared to a larger import decline of 161bps over last year. During December, the trade deficit narrowed by 11.2 percent month-on-month, due to a bigger drop in monthly imports than in exports.
Remittances continue to remain provide a stable stream of sizable foreign exchange. The half-yearly CA balance was also supported by a healthy YoY growth of 12.5 percent in workers’ remittances during 1HFY13. Remittances also showed a rising trend in December, registering a month-on-month growth of 11.5 percent and a YoY growth of 4.6 percent. Analysts expect the growth momentum to continue in short-term.
The situation in the financial account is worrisome, though, as it produced a net deficit of $677 million in 1HFY13. The half-yearly FDI and Portfolio investments have shown improvement over previous year, but the decline in financial inflows that used to come from project aids, programme loans, bilateral grants, etc. has put a strain on the financial account, which the low investment inflows aren’t in a position to offset.
Moreover, during the six-month period, the banking sector outflows have been relatively higher, on transactions such as foreign debt repayments and funds transfers to the banks’ nostro accounts abroad.
In the end, the overall balance of payment in 1HFY13 showed a remarkable (70 percent) improvement over same period last year – thanks to the CA surplus. Very little is left to rejoice over these positives, when the country’s forex reserves and currency are under constant pressure due to continued repayments to the IMF.
Pakistan is scheduled to repay to the IMF another $1.7 billion during the second half this fiscal, which would further deplete the SBP’s forex reserves and depreciate the rupee against dollar even more. Moreover, with no certainty over financial inflows from various sources including the CSF reimbursements, the CA will most likely plunge back into red during the second half.
But a rerun of 2012 has to be avoided because the cushion that was available last year is no more. At current import levels, Pakistan’s forex reserves can only pay for about four months of imports. Though the government is reportedly in talks with the IMF for a new (or interim) bailout loan, the country’s fractious political economy may make things difficult. That should be tackled before panic button is pressed!

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KEY ITEMS: BALANCE OF PAYMENTS

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(million $)                Dec FY13    1HFY13    1HFY12

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Current account balance         697       250   (2,426)

Exports                       1,819    12,011    12,051

Imports                       3,008    19,625    19,946

Workers Remittances          1,135     7,117     6,325

Financial account              (378)     (677)      517

Direct investments              254       563       532

Portfolio investments           (17)      124     (162)

Overall Balance                 357      (541)  (1,792)

SBP gross reserves           10,094    10,094    14,451

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Source: SBP

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