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As expected, May-2020 current account position is marginally in surplus. It looks like monthly imports have bottomed out ($2.8 bn), as have exports ($1.3 bn). Both exports and imports are slated to pick pace in June, driving the current account into deficit. Home remittances are resilient so far; but may take a hit in coming months. 11MFY20 CAD stands at $3.3 billion (1.4% of GDP) – and is down to one fourth of the deficit same period last year.

The impact of lockdown in Mar-Apr on imports had to come with a lag. The figures in May reflect the slowdown in the previous one and a half months. Now the economy is opening up and the oil prices are heading north. Thus, imports shall pick up going forward. In May, imports at $2.8 billion are at 48-months low.

The oil imports (based on PBS data) stood at $327 million in May – that is, one third of oil imports in pre-COVID days. Pressure on oil imports has picked up in the ongoing month. Refineries are operating at suboptimal levels and demand has increased. Oil imports would converge to normal levels in June.

In many other items, imports may remain low for the next few months. PBS based imports averaged at $4.0 billion during Jul-Feb, and thereafter the average fell to $3.1 billion (Mar-May). The number may hover around $3.0-3.4 billion in the next few months. The commodity prices are at discount to pre-COVID levels and are likely to remain low till global demand normalizes. Demand of imports in Pakistan will remain low till the domestic economy is back to its normal – or perhaps a new normal.

The story of exports is rather encouraging now. Exports (on SBP data) stood at $1.2 billion in May – lowest in many years. But SBP data is not a true reflection of the ground realities for the past month or two. It is based on realization of export payments that takes place with a lag of 30-90 days (depending on customer credit, on LC/contract terms). Thus, these reflect with a lag. For impact of global and Pakistani lockdown, PBS data (based on actual shipment) is a better indicator.

PBS-based exports bottomed out at $957 million in April. This was due to low demand from foreign buyers and lockdown both back home (factories were closed for good part of April), and in export-destination countries. Exports recovered to $1.4 billion in May. A leading exporter is of the view that the number shall reach $1.7-1.75 billion by June. Average monthly exports in Jul-Feb stood at $2.0 billion.

That would make for a decent month-on-month recovery in June. In textile, few items have already recovered in quantity terms to pre-COVID levels, but low prices may lead to some decline in value. However, categories in fashion and denim are still struggling. For these to normalize, the world must come out of the COVID fear, which seems a distant future. Thus, exports may hover around $1.6-1.8 billion per month in the foreseeable future.

Some analysts are of the opinion that there is an opportunity to capture the market that China is losing to the US in an ongoing trade war. Theoretically, that is true. But Pakistani export base is narrow, which will take time and innovation to expand. Low productivity is a big roadblock. In terms of existing textile and other areas, many companies were operating at full capacity during pre-COVID times. A few are in expansion phase, but the economic uncertainty is not allowing the industry to kickstart massive expansion.

The surprising element is that home remittances seemingly are unaffected by COVID. That is hard to digest. There are incidences of layoffs in Middle East. Other countries in the region have seen a sharp decline in remittances after COVID. On the flip, a remittance at $1.9 billion May is similar to the monthly average of Jan-March.

Remittances remained partially high due to Ramzan and Eid related flows in the last two months. It would be interesting to see the number in June as there might be some dent. The other reason for resilient remittances is that unofficial channels were either unavailable or they lacked netting off opportunities. One hypothesis suggests that the unofficial remittances have been routed to official banking channels in the past two months. And that has diluted the impact of otherwise official channel decline.

Overall current account deficit shall remain better than pre-COVID in the next few months. Remittances may fall but could be overcompensated by the improvement in goods and services trade balance. Not to mention, there is significant decline in imports of services as travel is low. There are signs of pick up in exports of services (mainly IT related).

The bottom line is that current account deficit is not a big problem anymore. The real challenge is the financial and capital account and for the very reason the currency has remained under pressure lately.

One good stable relationship between Pakistan and Afghanistan news has come from $1 billion inflows from ADB and WB yesterday. Expect $1.4 billion from China in June ($300 mn is expected today). Another $500 million from AIIB is due as well. In total, $2.8 billion capital and financial flows are expected in June and the debt repayment is around $400 million. Reserves are expected to rise to $13 billion in a month or so. Together, these fundamentals suggest that currency should pull back by 5 percent or so in the next few weeks.