Current Account roundup

The current account deficit normalized to $773 million (2.8% of GDP) in July as compared to $1.6 billion in the previous month. The deficit is falling in the manageable range of 2-3 percent of GDP. Not a bad start to the year. Nonetheless, the uncertainties around the balance of payment may continue. The key is to watch international commodity prices. The good news is that crude oil is currently at 12-13 percent discount to July’s average. That gives some comfort to the balance of payment worries at home.

The improvement in CAD in July as compared to June is primarily on account of fall in goods imports – down from $6.3 billion to $5.4 billion. As mentioned in the last month’s commentary that barring one-offs (in June), the current account deficit in the monthly range of $500-700 million is manageable – for details read “CAD: time to manage imports” published on 26th July 2021. With oil prices coming down, imports bill is likely to remain at comfortable levels. The uncertainties are around remittances flow. The question is how sustainable current formal flows are after the reopening of travel from Middle East – UAE and Saudi Arabia.

In July 21, imports stood at $5.4 billion – down by 15 percent MoM and up by 51 percent YoY – as last year July was part of an exceptional period due to Covid related lockdowns. Exports of goods stood at $2.3 billion – down by 10 percent on MoM and 20 percent up by YoY. The pace needs to pick to reach around $30 billion by the end of the year. Good trade deficit stood at $3.1 billion in July – down by 18 percent MoM. There is no significant change in service trade balance, and overall goods and services trade balance has improved by 17 percent (MoM) to record the deficit at $3.4 billion. Home remittances are steady– at $2.7 billion – up by 1 percent MoM and down by 2 percent on YoY.

In June, the red flags were raised on imports where the trend is now normalizing to new levels of $5.2-5.5 billion per month. There are some new recurring elements in imports which were not present in the past – such as TERF related imports – around $100-150 million per month, Covid vaccine imports – similar number of $100-150 million per month. These two are likely to persist throughout this fiscal year. Then there are questions on the continuity of food related imports – wheat and sugar. Then there is higher pressure of automobile imports due to lower taxes and duties on both CKD and CBUs (for EVs).

Food group imports are down by 14 percent MoM to stand at $588 million in Jul-21. The improvement is across the board, and it seems that in June there were higher imports payment due to year end. The key is to see palm oil imports which stood at $242 million in July and is up by 19 percent as compared to monthly average import of last year. The prices are still very high, and the expectations is for these to tame down in the upcoming season, and this may ease some pressure.

Machinery imports are down by 21 percent (MoM) to $765 million in July21. There will be some pick up in textile and other machinery imports due to TERF in the coming months. The monthly decline is mainly in power machinery (46%), textile machinery (31%) and mobile phones (23%). Phones import almost reached $2 billion in FY21 – doubled form the previous year, and that higher number is likely to continue as now all phones are coming from formal channels. There are now CKD and CBU imports of phone – as local manufacturing is picking up. SBP and PBS should have bifurcation in reporting for market to disclose more information regarding the rate of localization. The good news is that the first shipment of mobile phone exports took place in August. The number is low so far, but this will grow and become significant in years to come. And in the process, phones CKD imports will grow invariably.

The only sub-sector where on monthly basis there is an increase in imports is transport – up by 12 percent to $334 million. Since the government has lowered the duties and taxes in the budget there is a pressure on imports. Right now, there is a global chip shortage and that is delaying cars delivery at home and has slowed down the CKD imports to an extent. The higher increase is seen in CBU cars imports – up by 62 percent MoM to $53 million. This is an even higher increase from average monthly CBU imports of $20 billion last year. One of the reasons for hike is lower duties in EVs as CBUs.

Petroleum imports in July stood at $1.0 billion down by 15 percent MoM. The overall demand of petroleum products (including RLNG) is growing due to better economic activities and not passing of the impact of higher oil prices onto consumers. There is no check in demand due to higher international prices, but its impact is visible in import bill – July import is up by 28 percent versus average monthly imports last year. With oil prices down by over 10 percent from the average in July, there will be some comfort in the petroleum import bill provided the low oil prices continue.

The story in the remaining groups – textile, metal and chemicals are similar where there is 3-11 percent decline from last month, but overall imports are higher than last year July or from yearly average of last year. The higher momentum is due to higher commodity prices and economic pick-up. With ease in international oil prices, there is a chance of some improvement in the other commodities as well. Once that happens, there could be some respite in numbers.

The story of exports is shaping up well as monthly exports are now consistently above $2.2 billion for the past few months and there are new avenues of exports coming up. Nonetheless, food exports were less impressive in July – down by 22 percent MoM and 8 percent by YoY to $310 billion. Textile exports are down by 7 percent MoM to $1.36 billion in July and up by 37 percent on YoY. The number in July is 13 percent up from the average monthly exports of $1.2 billion in FY21. The textile exports may hover around $1.3-1.5 billion a month this year and the better performers are the value-added sector. There is expansion taking place in the sector as suggested by TERF and overall textile machinery imports and this all may help in exports.

The exciting stuff is happening in the other manufacturing sector where the number is down by 6 percent YoY and up by 14 percent YoY to $338 million in July 21. Although, within it, the engineering goods number is low in July, here new avenues are opening – such as mobile phones, tractors, and two/three wheelers. According to EDB estimations, annual exports from these three heads could be around $100-200 million this year, and the number can grow in years to come.

Nonetheless, there is limited upside in good exports as compared to imports pick up in absolute number. The real gain could be from services exports – ICT – which is lately performing better. Then the startups in Pakistan are gaining traction, and these can fetch good FDI. But the real game is to persist the remittances at current pace of around $2.5-2.7 billion per month. The test will come when travel opens in post vaccinated world – especially travel for Haj/Umrah and to UAE. Barring the challenge of continuing remittances pace, current account seems to remain in the range of SBP’s comfort level of 2-3 percent of GDP.