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The current account surplus stood at $1.16 billon (1.3% of GDP) in Jul-Oct20 versus deficit of $1.4 billion (1.6% of GDP) in the same period last year. Current account has been in surplus in five out of last six months, and the main reason behind this trend is an exogenous factor known as Covid-19.

Scratching the surface, it is crystal clear that had it not been for Covid-19, the current account would not be in surplus. The driving factor is remittances – up by $1.98 billion in 4MFY21. Other current transfers – donations including money sent by NGOs, increased by $553 million in the period. The other important element is imports of services – down by $695 million in 4MFY21. This is due to less travel – expenditure on air tickets (on net basis) is down by $171 million in Jul-Sep; and that on other travel services – hotel booking, credit card spent etc.- are down by $184 million in Jul–Sep.

The cumulative impact of these (non-goods trade and current transfers) is $3.3 billion in the current account in Jul-Oct ‘20. The net positive current account relative to same period last year is $2.6 billion. If all these are back to pre-Covid levels, current account deficit could have been higher in FY21, compared to the same period last year.

Trade deficit of goods has in fact worsened by 4 percent in Jul-Oct ‘20 as decline in exports (10%) is higher than imports fall (4%). And even the fall in imports is partially due to low oil prices. The oil prices (Brent) in 4MFY21 averaged at $42/barrel versus $63/barrel in the same period last year. Had there not been any Covid related slowdown, imports would have been higher.

The point is that there is no doubt that Covid has given a significant support to Pakistan’s balance of payment. The recent round of currency appreciation was attributed to better inflows due to above mentioned factors. Even the open market demand of foreign currency for travel needs is less – people mostly buy dollars from open market for cash needs during travel. Since that demand is absent, the exchange companies are net sellers of foreign currency in the interbank market – and SBP has used that amount to lower its forward/swap liabilities – down by $919 million in October.

People generally don’t realize but foreign travel for business and tourism needs is a big dent on the current account. The trend of low travel is likely to continue till the Covid fear is in the game. Oil prices are likely to remain depressed till global travel is subdued. Even the surprise growth of remittances is due to less travel as people who used to send cash back home via travelers are now using formal channels. The tailwind is here to support current account position, till the travel is low.

Having established the fact that less travel is a bliss, there is an encouraging trend on exports and there is some pick up in imports to enable better economic growth in FY21. Based on PBS data, exports are up by 0.6 percent in Jul-Oct. In October exports stood at $2.1 billion – highest number since February. The exports were picking up prior to Covid as there was some business transferring to Pakistan from China in value added exports and other products due to US-China trade war.

Within exports, the value added segments are growing while semi-finished products exports in textile is falling. That is good as higher value addition not only churns more dollars but also provides higher jobs. Knitwear exports standing at $323 million in October could be an emerging star. There is a good run in readymade garments too. The price per unit being sold has almost doubled in a year – depicting two things. One, that high end European and American markets are opening up for Pakistan; and two, prices are generally up due to supply value chain disruptions.

The worry is that the basic raw material of textile (cotton imports) is up. Unfortunately, cotton crop deterioration continues due to lack of investment in the seed technology. The comparative advantage that Pakistan once enjoyed has seemingly gone. Pakistan imported $290 million worth of cotton in Jul-Oct (up by 5.2 times) and that has eaten up all the growth ($192 million) in textile exports on net basis.

The other problem area is food imports - up by 43 percent to $2.3 billion in 4MFY21. Agriculture is clearly the weakest link here. It should have been the strength of supposedly an agrarian economy. $214 million worth of wheat is being imported and enough has been written on ill-tamed wheat in this space. The other noteworthy area is palm oil whose imports are up by 31 percent. Here higher prices are playing a role.

Machinery imports are down by 6 percent. But this number will surely grow. Under SBP’s TERF policy, concessionary 10-year loans for plant and machinery approved number stood at Rs186 billion for 240 projects. This will add over a billion dollar in plant and machinery imports – but it is good for growing the much-needed manufacturing base.

The Covid benefit is visible from 25 percent decline in petroleum imports to $3.2 billion. This is despite the fact that import of petroleum products in volumetric terms is up by 67 percent and crude oil import is up by 16 percent. Some of this increase is attributed to decline in RLNG import as FO is being used in power generation whereas RLNG plants come first on merit order. This is happening to keep domestic energy value chain operational; but certainly a sub-optimal decision.

The transport group imports are down by 5 percent in 4MFY21; but are up by 85 percent in October. This is visible from the growth in automobiles sales which are up by over 40 percent including non PAMA members’ sales. Low interest rates and new options are exciting consumers in this segment – CKD imports for motor cars is up by 78 percent to $72 million in October.

The bottom line is that with low interest rates and natural recovery, the economic activities are likely to pick up in the coming months. Exporting sectors are close to full potential and are in the process of expansion; but the exports growth would not be enough to offset the imports growth. Policy makers have to watch this and should not let the current account slip too much, as after Covid, it may once again return to deficit. That is why too much currency appreciation is not good. Now the currency is changing directions, its best for it to hover in range of 158-162 where exporters are comfortable.

The other element to note is that the financial account is in negative in the year so far. SBP reserves are down by $205 million during Jul-Oct; whereas the current account was in surplus by $1.2 billion. This coupled with net positive direct and portfolio investment is suggesting that the external debt is falling. This trend is healthy. Either SBP should let the debt to continue to fall or a better strategy would be to boost reserves till the Covid fear is on. This will give government a chance to boost growth in the next two years.