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The current account deficit tamed in January 2021 (versus Dec 2020) to $229 million. The era of monthly surpluses is gone. Nonetheless, the 7MFY21 surplus is standing at $912 million (0.6% of GDP) as compared to deficit of $2.5 billion (1.6% of GDP) in the same period last year. The full year current account deficit will remain well within 1 percent of GDP.

However, with pickup in economic activities and soaring international oil (and other commodities) prices, surpluses may well be over. Low travel is still giving cushion in terms of higher remittances, and less services imports (due to low travel, ticket, and other expenses).

The direct impact of low travel is still in favour; but the indirect impact (due to low oil prices) is vanishing; as with speeding up of vaccination, the oil prices are already up in anticipation of opening up of travel. This will strain the import bill in Pakistan.

Imports in January 2021 stood at $4.4 billion - down by 12 percent from Dec 2020. It was expected. In Dec 2020, SBP imports were of the same level as of PBS. That was an anomaly as PBS imports incorporate freight and other charges. Historically, the average monthly discount of SBP imports to PBS imports is at $330-350 million. In Jan 2021, PBS imports stood at $4.8 billion and the SBP at $4.4 billion – as per historic norm.

Within 7MFY21 PBS based imports, the highest growth is in food items – up by 51 percent to $4.7 billion. The main culprits are wheat and sugar. Palm oil imports are up by 37 percent (quantity up by 10 percent). This is primarily due to higher prices of Covid related supply chain breakdown. This is likely to normalize, and so will wheat and sugar imports. The food imports bill growth will be tamed. Machinery imports are up by 2 percent to $5.2 billion. Within it, 35 percent is of power sector related imports. The highest growth is in mobile phones (although its classification as machinery imports is anomalous) up by 49 percent to $1.1 billion in 7MFY21. This is due to shifting of the mobile phone imports to legal channel after implementation of DIRBS. Barring mobile phone, machinery imports are down by 11 percent.

Transport imports are up by 48 percent to $1.4 billion. Low interest rates and number of new cars launched in the market are creating this growth. The CBU cars imports are up by 166 percent to $116 million. The CKD imports of cars grew by 79 percent to $468 million.

The savior is petroleum imports - down by 21 percent. Thanks to the low oil prices – Brent averaged at $45.2/barrel in 7MFY21 versus $62.5/barrel in the same period last year. The price is down by 27 percent and the import bill is down by 21 percent – implying higher volumes this year – petroleum products volumes are up by 43 percent and crude volumes are up by 15 percent.

The higher growth in products is due to curb in smuggling – especially from Iranian route. Now with oil prices flirting over $60/barrel, petroleum imports bill will soar in months to come. The RLNG imports are up by 47 percent. With falling domestic gas share in the pie, RLNG imports will grow further in years to come.

Exports in Jan 2021 stood at $2.1 billion - down by 7 percent from Dec 2020. The exports in 2QFY20 (Oct20-Dec20) at $6.5 billion are the highest since 4QFY11. In 4QFY11, the cotton index was by far at the highest ever level (at $4.57/Kg). In the 2QFY20, the cotton index was at $1.72/kg. One can safely say that at these volumes, last quarter exports were the highest ever.

The story of textile is well established. There is decline in exports of cotton cloth (9%) and cotton yarn (24%). That yarn and cloth is being used within country to add value. Every item in the value-added segment is heading north - knitwear up by 19 percent, bedwear by 16 percent, towels by 20 percent and readymade garments by 5 percent.

The downside is the poor cotton crop in Pakistan. The projected production this year is at 35 years low. This is resulting in imports of cotton – up by 2.7 times to $715 million. Had this cotton being produced at home, net exports of textile would have been higher. The cotton crop decline in production is mainly due to poor yield, not substitution of crop.

The overall good trade balance (SBP) is worsened by 18 percent to 13.7 billion in 7MFY21 – imports are up by 6 percent and exports are down by 4 percent. The savior is imports of services - down by 14 percent to $4.5 billion. This is sheerly due to low travel as air ticketing and hoteling etc expenses are down. The trade deficit of goods and services is up by 10 percent to $14.9 billion.

The main reason for having current account surplus is none other than home remittances and other current transfers. Worker remittances are up by 24 percent to $16.5 billion. The other current transfer (including charity and donations) increased by 105 percent to $2.4 billion.

The current account deficit will remain mild till the travel is restricted. The efforts from government and SBP are required to make these changes sticky and to make this increase permanent.