No silver lining for the balance of payments

Clocking in at nearly 2.8 billion dollars during 8MFY12 - against a relatively mere 190 million dollars in the same period last year - the current account balance is already high enough to cause economic managers to knit their brows. Much of the deterioration in the current account balance comes at the heels of a worsening trade balance, which alone recorded a whopping deficit of 3.2 billion dollars during July-February FY12. The real culprit in offsetting the balance on goods traded were imports, which surged year-on-year by about 18 percent during 8MFY12, while exports surged by a comparatively smaller five percent. Rising oil prices globally are largely to blame for the rising import bill of Pakistan. According to the latest trade data of the Pakistan Bureau of Statistics uptil January FY12, average monthly price of petroleum products has risen by over 30 percent year-on-year during 7MFY12. On the exports side, declining cotton prices contributed to a slump in the export of raw cotton, a key export item of Pakistan. Even though prices of value-added textile products have not receded as much, significant volumetric declines in these products have been witnessed for most of this fiscal year. It is further expected that the effect of declining cotton prices - fallen by over 20 percent year-on-year during 8MFY12 - will hit the prices of value-added textile products with a lag, further dimming prospects of any improvement in exports in the months to come. Workers remittances, however, have been relatively kind on the countrys current account, improving by about 23 percent year-on-year during July-February FY12. But the increase was not strong enough to mask the impact of the colossal trade deficit. The capital account side continues to present a grim picture of falling FDI inflows and ebbing portfolio investments - down 45 percent year-on-year to 570 million dollars and a decrease of 370 million dollars, respectively, during 8MFY12. A notable outflow of over $500 million from banks was also recorded for July-February FY12, further hitting the capital account. Overall, the balance of payments continued to show signs of pressing concerns highlighted above. With the first installment of 399 million dollars repaid to the IMF in February, the position of SBPs reserves has become grimmer. During February alone, SBPs reserves fell by 687 million dollars, while they were down by a colossal 2.5 billion dollars by February FY12 relative to February FY11. With mounting pressure on the countrys reserves, the rupee has been plunging against the dollar recently, and theres no respite in near sight as more repayments to the IMF will have to be made and oil prices appear to rise even more in the coming few months.

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Key items, balance of payments - Jan FY12
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                                                       Jul-Feb
(million $)              Feb FY12   Jan FY12     FY12     FY11
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Current account balance      -260       -364   -2,952     -194
Exports                     2,152      1,974   16,251   15,408
Imports                     3,562      3,314   26,766   22,757
Workers remittances        1,157      1,111    8,593    6,963
Financial account            -214         15      109    1,520
Direct investments            -24         63      571    1,046
Portfolio investments          15         -3     -131      242
SBP reserves               12,209     12,896   12,209   14,731
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Source: SBP