BoP: not much to worry

The dip in commodity prices (read oil) is yet to be seen easing the balance of payment (BoP) slippages. Current account deficit widened to $1.8 billion (1.8% of GDP) in Jul-Oct as compared to $1.4 billion (1.7% of GDP) in the corresponding period last year. The gap in October ($347 mn) is considerably higher than what it was ($79 mn) in the previous month, however, barring CSF export receipts in September, the picture has not changed much.
Exports of goods continued its southward journey as they fell by 3 percent or $276 million in the period under review. One could have imagined the fall in textile and other manufacturing exports is the prime reason for lower figure, but that is not the case. Yes, lower cotton prices amid depressed demand is taking toll on the low value-added textile groups as cotton yarn and cloth exports experienced declined in both volume and value of exports in the first quarter. But, their 15 percent fall in dollar terms is compensated by the benefit accrued in the high value-added segment after attaining GSP+ status in imports to EU counties.
In a nutshell, overall textile exports have stagnated and there is no dip visible in any other manufacturing exporting sectors. The difference is made by other exports, which were minus $85 million in Jul-Oct as against $304 million in the same period last year. One may wonder how can export proceeds be in negative (for details reed "The other exports published on 30 September 2014). That can only be explained by the break-up which is not provided by the SBP. Barring this anomaly in other exports, export proceeds would have increased by 1 percent.
On the flip, import bill kept on cruising as it increased by 10 percent or $1.3 billion to $15.5 billion in Jul-Oct 2014. The increase is virtually equally distributed amongst various sectors in the first quarter with highest share of imports being that of oil, which jumped by 9 percent. This shows that economic activities are picking up and higher demand is resulting in growth in the imports bill.
The good news is that global oil prices are falling but the impact is yet to be seen in imports bill. The imports are expected to fall by $200-250 million in November and they may remain low till the oil prices are downward sticky. Hence, half of import growth will be precipitated in the downhill journey of oil prices.
The silver lining is in persistent high growth in home remittances, which was $6.1 billion (15% growth YoY) in Jul-Oct. That has largely covered the trade gap of $7.5 billion. Whatever the factors behind robust worker remittances, it is doing the saviors job. The worry is if the oil prices attain their medium-term equilibrium at the low range that they are trading nowadays, it may negatively impact the money emanating from oil-rich Middle Eastern region - 80 percent of incremental remittances in Jul-Oct came from the GCC countries.
However, this trickle down impact of lower oil prices on any decline in remittance growth from GCC countries may take its sweet time and one must safely assume that the dip in commodity prices will ease the current account deficit for the rest of the financial year. The concentration of finance ministry and the central bank shall be on building financial and capital accounts by enticing foreign direct investment and raising money through internal financial markets through both debt and equity transactions.
FDI picked up in October which has resulted in 47 percent yearly growth in net investment to $424 million in Jul-Oct and similar is the story of portfolio investment. The highlight of the month is conversion of Zongs debt, which it had assumed from its parent company in May to pay for the proceeds for acquiring 3G and 4G licenses.
Debt outflow by China in telecom sector was $679 million while the equity inflow was $821 million in October. The positive difference of $142 million is probably the investment coming in for creating infrastructure to roll out next-generation services across the country and more investment in the area from Zong and other companies is likely to follow in months to come.
Apart from FDI, BoP is targeted to improve by Sukuk offering of around $1 billion and secondary offerings of couple of banks. Apart from these, $1.1 billion is expected to come from the IMF in December. With all these flows and tamed current account deficit, asking foreign reserves to reach $15 billion by December end is not a tall task. However, SBP reserves were down by $300 million in October and by November 14 total liquid foreign reserves were at $13.2 billion.

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Key items: Balance of Payments

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$ (mn)                          4MFY15     4MFY14       Chg

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Current account balance        (1,759)     (1,368)      29%

Balance on trade in goods      (7,469)     (5,838)      28%

Exports                         8,071       8,347       -3%

Imports                        15,540      14,185       10%

Balance on trade in services     (688)       (936)     -26%

Exports                         2,091       1,662       26%

Imports                         2,779       2,598        7%

Balance on primary income      (1,335)     (1,191)      12%

Workers remittances            6,078       5,276       15%

Other current transfers         1,567       1,256       25%

Capial account balance             39          52      -25%

Financial account balance      (1,046)       (211)     396%

Net FDI                          (390)       (208)      88%

Portfolio investments             142         108       31%

Overall balance of payments       641       1,544      -58%

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