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The current account C/A has now been in surplus for three consecutive months. The surplus stood at $792 million in Jul-Sep. This is a significant improvement from the deficit of $1,492 million in the same period of last year. There is some improvement in the trade deficit, but that only explains one-fourth of the reduction in the current account deficit. The real driver is upbeat remittance - up by 31 percent in the quarter. This is an excellent combination, as long as it continues. This improvement in current account is possible when the interest rates are at cyclical trough, which is a rarity. This current account deficit reduction coincided with signs of economic growth pick up. This is evident by uptick in automobiles, cement, steel, fertilizer, etc. This is happening at a time when non-oil imports are picking up - which is a clear sign of economic recovery.

However, there is not much change in the structure of economic recovery. Growth is closely linked to domestic demand which is driving import of raw material and intermediary goods. The only difference is that with steep currency depreciation, since the last boom, food and other goods in final consumable shape were falling. There is nothing much to take home on exports - down by 4 percent in Jul-Sep. One reason for the decline is COVID-related slowdown in exports destinations. That said, there wasn't any meaningful growth in exports prior to COVID either. The prime reason for better balance of payment situation is a surprising growth in home remittances. The World Bank was estimating remittances to decline in countries like Pakistan but the opposite happened - in fact, the 31 percent growth in the first quarter is highest since Apr-Jun 2011. Higher growth in 2011 was attributed to Pakistan Remittances Initiative that had incentivized banking channels to attract remittances from formal channels. Lately, COVID has dried down the informal channels (hundi/hawala) for money transfer across borders. Plus, global restrictions (and especially FATF related actions in Pakistan) have made it difficult for money to funnel through informal channels - including cash carrying through international flights. The other reason for higher remittances is that people are moving back to Pakistan due to job losses in the aftermath of COVID. These people could be moving back along with savings. If that is the case, remittances will fall sooner than later. However, we don't know which factor is contributing how much, as there is no data to validate how many people are moving back and there is no data available on informal channel movements.

The other reason for lower import bill is favorable oil prices. Brent crude prices averaged at $43 in Jul-Sep20 versus $62 in the same period of last year. According to Pakistan Bureau of Statistics (PBS) data, oil imports in the 1QFY21 are down by over 25 percent despite higher volumes. Oil prices will remain under pressure till COVID threat persists to reduce petroleum demand transportation (mainly air travel). Current account surplus has reduced the pressure on PKR which was earlier depreciating. The currency has appreciated by around 5 percent in the past couple of weeks to five-month high. Apart from better current account, USD depreciation against currencies of other trading partners of Pakistan also explains PKR strength against the USD. Currency strength will be dependent upon foreign exchange flows and inflation. The SBP reserves soared to the highest point under this government at $12.8 billion on September 11, before coming down to $11.8 billion by October 9. The decline is attributed to commercial external loan repayments. According to government sources, these will be attained again at probably better pricing, since global interest rates are down.

Majority of flows in the last few months were due to current account deficit reduction and multilateral lending support. That support continuation is now dependent upon the IMF nod. For that to happen, politically tough calls on energy prices and taxation measures must be made. This will likely put further pressure on inflation, which is already discomforting. The real interest rates are in negative territory and this is promoting consumption- evident from the growth in automobile financing through banks. The higher growth in this and other sectors will push the import bill up in coming months. Even in Sep20, imports based on PBS data stood at $4.3 billion - this is on actual landing of imports. The SBP recording on import payment stood at $3.8 billion. Imports are likely to stay higher as economic recovery continues. The expected pressure on current account and inflation will translate into currency depreciation or interest rates hike. The SBP must make a call with regard to which indicator should be used as the anchor. If the aim is to keep currency stable, interest rates could move up in the second half of this fiscal.

Copyright Business Recorder, 2020