The current account deficit stood at $3.4 billion (annualized 4.1% of GDP) in the 1QFY22 (Jul-Sep 21) as compared to a surplus of $865 million the same period last year – a sharp departure from tailwind to headwind. The economic managers naively thought that the bonanza of current account surplus (or marginal deficit) shall continue without resolving the structural issues. The reality is now hitting back hard.
There is significant growth in both imports and exports as compared to the first quarter of last fiscal. The higher growth in imports is due to low base which was due to lockdowns and the profound factor was low commodity prices. Exports are up by 35 percent to $7.2 billion while the imports are up by 64 percent to $17.5 billion.
The savings from low commodity prices on imports are now gone with prices moving too high. The reserves buffer created in that time is fast depleting. The gain in currency is all eroded. The goods trade deficit almost doubled to $10.2 billion in the 1QFY22. Home remittances upbeat momentum continues – which are up by 10 percent from a high base to $8 billion in Jul-Sep. However, with travel opening (especially Haj and Umrah), there could be some pressure on remittances.
The focus of the policy makers is to put a break on imports growth. At this pace, of average $5.8 billion per month, imports bill could touch $70 billion in FY22. And the way commodity prices are moving, the number could be even higher, assuming the high price momentum will continue for the rest of fiscal year. Pakistan does not have enough foreign earnings or assets to sustain these. That is why tightening screws are in action.
The imports growth is across the economy. Highest growth has come from transport sector followed by the petroleum group. In both cases, low domestic prices spurred demand and high international commodities prices have role to play. Next in line are metal group and food – in former both price and demand are playing while in food it is mainly price and top of the list is palm oil.
Food imports are up by 43 percent in the 1Q to reach $2.0 billion. Out of the two big items – there is virtually no change in tea imports while for palm oil the bill is up by 73 percent. Then the increase of 67 percent import in pulses is perhaps largely contributed to price increase.
Machinery group imports are up by 19 percent to $2.3 billion in Jul-Sep21. By far the biggest increase is in textile machinery imports – up by 155 percent to $325 million. At this rate, the textile machinery imports can touch $1 billion in the full year. Thanks to concessionary finance – LTFF and TERF, and government’s support to exporting sectors – especially textile. Last year, the textile machinery imports stood at $855 million. Last time, the textile machinery yearly imports were north of $800 million was in FY05 and FY06.
The hot sector is transport – imports are up by 139 percent to $943 million in Jul-Sep21. At this pace, toll could reach $4 billion for the full year – could be the highest ever number. Last year (FY21) transport imports were highest ever at $2.7 billion and barring first quarter (which was low due to lockdowns), the quarterly average imports stood at $784 million. The auto sector imports were already at its all-time high and in this budget the government reduced the price to enhance demand. And now the current account is slipping and there are curbs from SBP on auto financing. Buyers should expect car prices to increase soon due to currency depreciation.
CBU cars imports are up and its mainly EVs due to duty and taxes concessions – up by 14x to $105 million in Jul-Sep – however - no more than 2,000 cars are imported in this price bracket – the policy is clearly supporting elite. The CKD cars imports are up by 2.7x to $377 million. Thanks to number of new models coming and lower prices. On the flipside, motorbikes – which are ten times the number of cars, quarterly CKD imports is mere $16 million.
The biggie is petroleum imports. With oil prices moving up, a ticking noise is coming from external account. The number is up by 91 percent to $3.97 billion in the 1QFY22. Petroleum products (mainly petrol and diesel) imports are up by 88 percent to $2.0 billion and crude oil imports are up by 62 percent to $1.2 billion. Bent prices on average increased by 71 percent to $73/barrel in 1QFY21. This implies that both prices and volumes are growing. Nonetheless, the main culprit is LNG – imports up by 3.1x to $734 million in Jul-Sep- thanks to crazy increase in LNG prices.
Other noticeable increase in import items are fertilizer, plastic, iron and steel and other items. Fertilizer imports are up by 109 percent to $269 million. This is perhaps due to soaring DAP prices. Plastic imports are up by 39 percent to $688 million in 1QFY22 and this probably is due to pick in demand and prices increase both. Iron and steel imports are up by whopping 89 percent to $713 million – as both prices and economic activities are growing. The other items are up by 86 percent to $1.6 billion – this could be primarily due to high coal prices as it is recorded in ‘other items’.
The growth is exports is not bad; but it pales in front of imports. The food group exports are up by 17 percent to $1.0 billion in 1QFY22. A new kid in the block is oil seeds, nuts and kernals – up by 10x to $35 million. The other noticeable growth is in vegetables – up by 47 percent to $59 million. The big-ticket item rice exports are up by mere 5 percent to $437 million.
Textile exports are finally picking momentum – up by 37 percent to $4.2 billion. At this rate, textile exports may touch $17 billion in the full year. However, the recent increase in cotton prices is yet to be fully passed on to the products prices as orders are usually pre-booked. With price advantage, the textile export number could be even higher. APTMA has claimed that $20 billion in FY22 may be achievable. The story is encouraging as exports of value-added items are growing at good pace – such as knitwear up by 46 percent to $1.0 billion, bed wear increased by 40 percent to $789 million and readymade garments jumped by 42 percent to $812 million.
The other manufacturing items growth stood at 18 percent and the toll reached $1.0 billion in 1QFY22. The growth is decent but not matching textile, as there are many sub-groups and mostly are small and medium players with no lobbying power relative to textile boys.
The goods trade deficit increased by 94 percent to $10.2 billion. And the overall goods and services trade deficit is up by 88 percent to $10.9 billion. Services exports are up by 23 percent to $1.6 billion. The ICT services exports kept on growing. It went up by 46 precent to $2.1 billion in FY21 and in the 1QFY22, the toll is up by 43 percent to $635 million.
In case of service imports, the blessing in disguise of less travel has continued. The services imports are up by 27 percent to $2.3 billion in the 1QFY22. The lion’s share of increase is due to transport services – up by 65 percent to $915 million. This is mainly in sea and air freight services which are directly proportional to increase in goods imports. The transport freight services import recording at SBP is simply at 5 percent of goods import, and in 1QFY22 the ratio of transport services to goods imports stood at 5.2 percent, and it was 5.4 percent in FY21. The ratio used to hover around 7 percent in FY19 and FY20 – where around 2 percent used to be due to air passenger transport which was $1.3 billion in FY19.passanger transport expense was reduced to $875 million in FY20-as travel was slowed down in the last quarter, and it shrunk to mere $202 million in FY21, and the toll recorded at mere $31 million in 1QFY22. Based on FY19 numbers, less transport expense is saving annualized $1 billion of services imports.
Similar is the story of air travel. Its toll on services imports was $1.7 billion in FY19 which was reduced to $1.2 billion in FY20 and $824 million in FY21. This has picked up a little in 1QFY22 – increased by 41 percent to $253 million. This has three head – personal (education/health), religious travel and others. Education and health related travel expense largely remained insulated to COVID. The reduction is mainly in religious and other travel – religious travel expense was $361 million in FY19, $335 million in FY20 and the number was rounded-off to zero in FY21. It was mere $2,000 in 1QFY22. Now with Umrah and Hajj to open, this will bleed the current account by $300-400 million a year. The other travel services imports were $1.5 billion in FY19 and were reduced to $657 million in FY21 and the number in 1QFY22 is proportional to FY21. Upon normalization to FY19 level, this can add $800-900 in the import bill.
Adding the three travel and transport related annual decrease on services imports due to less travel, the savings are $2.1-2.3 billion. This all can wash away with normalization of travel which shall further strain the current account. And till date, largely, these savings are intact. Then there are savings from open market where the demand of foreign currency remained is lower due to less travel, and exchange companies were net sellers in the interbank market. This can flip once travel resumes.
Then there is an indirect impact of less travel on remittances. One of the reasons for 27 percent growth in remittances in FY21 was shift of informal flows to formal due to less travel. The challenge is for SBP to continue to lure these to remain in formal channel when the travel – especially religious travel, opens. In 1QFY22, the remittances are up by 12 percent to $8.0 billion. The momentum continues. The growth is mainly coming from UK and USA - on a higher base. Middle East – where the core of labour force is, has shown a low growth with a marginal decline from Saudi Arabia. Job opportunities are thinning. Not a good sign.
There is significant decline in other current transfers – charity, donation etc. The toll is down by 56 percent to $461 million in 1QFY22. The average quarterly flows used to be $500-600 million in FY19 and FY20, and that had increased to $900 million in FY21 as people were sending higher donations and charity to counter economic sufferings of people in pandemic. That additional flows were probably one-off. This reduction at this pace, could strain CAD by $2 billion this year.
The bottom line is there are pressures from left right and center on the current account. The belt tightening is the only way to tackle and preserve the fragile economic recovery where cracks are appearing. The sustainability of external account hinges on globally commodity prices. Till the time they sustain high, alarm bells will keep ringing.
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