Current account is bleeding

The current account slippage continued in April as the deficit posted at $1.1 billion in Apr17 (Mar17:$546mn) and the toll stood at $7.2 billion in 10MFY17 - more than triple of what it was in the similar period last year. In terms of GDP, it stood at 2.7 percent versus 1.2 percent in FY16. The deficit was low In March owing to CSF inflows, relatively better exports, and remittances. April was not as lucky.

The cost of consistently running an overvalued currency has to be paid one way or the other; and the current account numbers are demonstrating it. The quarterly picture shows that the deficit is falling with every passing quarter and April numbers are building a similar story for the last quarter of FY17.

The biggest challenge Dar faces today is to curtail trade deficit and he seems to be failing. The Prime Minister export package is yet to deliver; implying that the success would be limited. In April, exports stood at $1.79 billion versus 3QFY17 average of $1.87 billion. The refund issue of exporters is lingering and cash strapped textile and other exporting sectors are finding it hard to compete.

Exports stood at $17.9 billion - down by 1 percent on a yearly basis. How much more would exports fall? It has come down from 10.6 percent of GDP (FY13) when the PMLN assumed government to 7.8 percent in FY16, and at 6.7 percent of GDP in 10MFY17. What would it take for the government to realize that exports are in doldrums? What kind of industry and export friendly government takes exports to pre-1992 era?

On the flipside, upbeat domestic demand and expansion in various sectors is keeping imports high. Imports stood at $4 billion in April as against monthly average of $4.2 billion in 3QFY17. Experts were expecting imports to be even higher in April; as according to the PBS, monthly imports crossed $5 billion in March; and the impact will come in SBP data in coming months. And in April, the PBS imports stood again at $5 billion. The Jul-Apr PBS imports bill is at $43.4 billion versus $37.9 billion in SBP. Yes, there is always some gap in data; but a billion dollar monthly gap is a little too much.

The gap in ten months is $5.5 billion and some of CPEC related imports are not at all being registered in Pakistan banking system to reflect in SBP data. Machinery import bill is recorded at $8.8 billion versus $5.2 billion in SBP book for 9MFY17 - the gap at 3.5 billion is double of what it was ($1.6bn) last year.

Even a 16 percent growth in 10MFY17 is less than actual; it is surely understated. Yes, it is machinery imports and imported demand for both final goods and factor goods is increasing and no doubt the economy is expanding. In FY17, according to provisional numbers, GDP grew by 5.28 percent which is the highest number is ten years. And high growth is driving imports to feed domestic consumption today; and industrial expansion for tomorrow’s consumption. However, in absence of domestic savings, investment gap would continue to be filled by foreign savings. The phenomenon is happening and is demonstrated by burgeoning current account deficit.

This trend is scary as consumer demand of young middle class dominated economy is likely to go further up in years to come. What foreign non-debt flows the country has to bridge the gap? The trade deficit of goods is up by a whopping 36 percent in 10MFY17 to have reached $19.9 billion. The number is even higher than last year’s $18.5 billion.

Trade gap is increasing over the past many years; but the remittances were higher to cover it. In FY16, inward remittances were 1.08 times of trade deficit. But the equation has changed since. The trade gap grew by 36 percent in 10 months while remittances fell by 3 percent in the same time; and the cover thinned to 0.78.

The biggest policy challenge is what will fill this gap? Do we need to look towards Pakistan Diaspora savings as most of remittances are for consumption? How to tap it? How to add new sectors and countries to Pakistani workers abroad? What new markets and skill set can we penetrate? How to build exports and how to curtail imports? What policy tools do we have? Can currency depreciation be of any help? These are burning questions, and need to be answered before it’s too late.

In capital and financial accounts, there is nothing significant to say as FDI is crawling whilst foreign aid and loans growth are not enough to plug in the current account deficit. The reserves are falling and Dar has not much left build it up by foreign loans.

The SBP reserves are down from its peak of $18.9 billion to $15.9 billion in six months. How much more to go; before the panic button is pressed? Would we end up going back to the IMF? And the fund would surely ask to adjust currency; as they did with Egypt, lately!