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The current account is finally in deficit after a surplus streak of 5 months. It stood at $662 million in December; and a surplus of $1.13 billion in Jul-Dec. The economic activities started picking up from July 2020 as lockdowns in Pakistan were over earlier than in other countries. The low commodities prices kept imports in check. Exports were low in 1QY21 (Jul-Sep), and so were the imports. In the second quarter, both changed gears. Naturally, the import increase in dollars is much higher than exports – resulting in slippage of goods trade deficit.

Less travel has lowered the services imports and work from home phenomenon boosted the IT services exports (or the proceeds are now coming from formal channels). The slippage in goods trade deficit is partially compensated by low services deficit. There is some pick up in primary income debit in December as companies are sending higher dividends at year end – a usual case.

The low travel and conversion to formal channels have kept the remittances and other current transfer growth upbeat – a well-established Covid-led lucky break. However, the uptick in goods imports in December was enough to show a significant deficit.

The snapshot of 1HFY21 is depicting that barring remittances, services imports, and other current transfers; the other elements of current account – mainly goods imports and exports are worse off from last year. Goods imports are up by 5 percent to $23.2 billion, and goods exports are down by 5 percent to $11.8 billion. The goods trade deficit worsened by 17 percent to $11.4 billion.

In December, imports crossed $5 billion (SBP data) for the first time since July 2018. The oil prices in Jul-18 were 22 percent higher than Dec-20. This implies that non-oil imports pick up is higher. The main culprit is food items. Detailed numbers are not yet published.

Based on PBS data, one can safely conclude that food imports are biggest contributor in growth - up by 86 percent YoY in Dec (52 percent in 1HFY21). Wheat and sugar imports (not usual import item) and hike in palm oil prices (due to global supply chain disruption) are the main contributors. These are going to normalize as wheat/sugar imports would end sooner or later and palm oil prices are already showing signs of normalization.

Soon machinery imports would show growth. These are up by 2 percent in December and 4 percent in Jul-Dec. The biggest contributor is imports of mobile phones (though it’s not machinery but is recorded in that section) – it contributes 22 percent of machinery imports in 1HFY21. Mobile phone imports reached $215 million in Dec (higher than cars CKD and CBU imports) – up by 82 percent in December and 52 percent in Jul-Dec.

The increase is attributed to implementation of DIRBS (Device Identification Registration and Blocking System). Although, it was launched in 2018, the impact is becoming visible in FY21. At the time of launch, the importers showed inflated inventory to avoid taxes on (near) future imports. Now the real import numbers are depicting themselves. With smart phone manufacturing to speed up in Pakistan, this number will fall in quarters to come.

However, the machinery imports will grow in quarters to come due to success of SBP’s TERF (Temporary Economic Refinance Facility). The approved loans reached at Rs300 billion and a higher amount is requested but not approved. This facility is expiring in April. It is expected to have an impact of around $2 billion on machinery imports in next 12 months or so.

The transport imports are growing fast – up by 35 percent in 1HfY21. Lower interest rates, launches of numerous new cars are driving imports in this segment. The number in January-March shall be higher as there were delays in import orders. Moreover, numerous CBUs are stuck at ports. The number will keep on increasing till the SBP revises up the interest rates.

The relief is coming in petroleum imports – down by 22 percent in 1HFY21. This is due to low oil prices as prices in 1HFY21 are down by 30 percent. The oil prices are moving up fast. The economy is picking up too. Soon the petroleum imports will move up. Another pain is growing raw cotton imports (reached $532 Mn in 1HFY21). This is to feed growth in textile exports. However, just like wheat and sugar, cotton imports are growing. Pakistan imported $1.3 billion worth of these three commodities in 1HFY21 – the number was mere $88 million in the same period last year.

The story of exports is shaping well. Based on PBS data, Pakistan textile recorded the highest ever monthly exports ($1.4bn) in December. But the SBP data is depicting a decline in exports in 1HFY21. Food exports are down by 8 percent. But textile exports are up by 8 percent. Within textile, the growth is in the value-added sector – barring cotton cloth and yarn, the textile exports are up by 15 percent.

The story of low travel blessings continues. Imports services are down by 16 percent on $711 million – mainly due to lower travel. The IT exports services are up, but the fall in transportation related services exports is nullifying the impact.

The silver lining is in remittances. Up by 25 percent or $2.8 billion to $14.2 billion. Enough has been written in this space on the subject. The story is converting of remittances to formal channels due to low travel. The other current transfers are up by 94 percent to $2.1 billion in 1HFY21. This $995 million increase is due to higher amount sent in charity and donation due to Covid through formal channels. Some part of RDA (not invested in stock, real estate, or NPC) is recorded here – the amount is close to $70-80 million.

The bottom line is that everything except imports are showing positive signs. The question is what has increased the imports to 2018 levels in December 2020. The above breakup of imports is based on PBS data; but SBP numbers are usually less than PBS - average monthly difference between the PBS and SBP data for the past 10 years is $333 million for host of reasons. But in December, both are almost same. Once SBP detailed imports numbers are published, the reasons for high imports will be clearer. But if the trend of $5 billion+ SBP imports continues, the hawks may dominate by March.