The current account slippage is not coming under control. The deficit stood at $1.7 billion in October – biggest monthly deficit since Dec 2018. The toll stood at $5.1 billion (annualized 4.7 percent of GDP) in Jul-Oct 21. In dollar terms, this is not the highest deficit. However, the goods imports are by far the highest in 4MFY22. The growth in imports is attributed to both higher commodity prices and pick up in economic growth. Better performance in exports and remittances has not let the deficit to be at all-time highs. The benefit of better foreign exchange earnings shall be visible once commodity prices reverse -there are recent signs of oil (and other commodities) taming down along with fall in the shipping prices. Then the hawkish stance by the monetary policy committee may help in curbing the deficit too.
The worry is imports’ growth. The bill stood at $23.5 billion in 4MFY22 – previous high in 4MFY19 was $18.5 billion. One other reason for higher imports number is curbs in smuggling/under invoicing of goods - such as mobile phones, rubber tires and petroleum products. Almost all the extra payment from formal channels is complemented by similar increase in remittances conversion from informal sector – net outflow from the country has perhaps largely remained unchanged.
Imports are up by 66 percent in 4MFY21. The higher increase is due to low base – owing to low prices and Covid related slowdown during same period last year. Food imports are up by 47 percent to $2.7 billion in 4MFY21. The cumulative net increase in sugar and wheat imports is $128 million in this period. The top contributor is palm oil where prices have almost doubled and so have the import bill – up by 78 percent to $1.1 billion.
The machinery group imports are up by 23 percent to $3.0 billion. The prime contributor in growth is textile machinery. The exporting sector is milking both concessionary finance schemes – TERF and LTFF. The toll stood at $434 million – up by 154 percent. There are many beneficiaries of TERF other than textile – and mostly are recorded in other machinery items which has increased by 52 percent to $833 million. Mobile phone (recorded in machinery items) imports are down by 16 percent to $677 million – this could be due to payment fluctuations as the PBS data is showing growth in 4MFY22.
The real boom is in transport sector. In automobile, with influx of new players and economic rebound, government’s concessionary steps in the budget are becoming a headache for the central bank in terms of managing imports. Imports are up by 130 percent in 4MFY22. In road motor vehicle segment (up by 165 percent) – the share of completely build units (CBUs) has doubled to 19 percent. The toll has increased by five folds to $192 million. Not all imports is of luxury cars. Buses, trucks, and other heavy vehicles demand is growing – up by 3 times to $72 million. Pakistan is too low in auto engineering sophistication level to build buses. But the increase in cars is much bigger – eight times to $117 million. Whether these are EVs, MGs or Cruisers, none of the car is for middle income segment. Nonetheless, almost half of the sector growth is in CKD car imports – up by 154 percent to $518 million. Relatively bigger cars with higher share of imported parts growing. The challenge is how to build core in the smaller cars where growth is lower.
The real economic challenge is coming from the increase in oil prices, and that has doubled the imports of petroleum group to $5.5 billion - growth is across three components – crude, petroleum products, and LNG. Highest is LNG – up by 179 percent to $1.1 billion in 4MFY22 - the price hike is higher in LNG too.
The story of exports is getting better too. Expansion in the textile industry and government support to exporting sector is yielding results – goods exports are up by 32 percent to $9.7 billion in 4MFY21 – previous high was $8.3 billion in 4MFY14.
Food exports are up by 17 percent to $1.4 billion. The bigger items - rice and fish, are growing in single digits. The new kid in town is oil, seeds, nuts, and kernels – increased by 9 times to $64 million. Next in line is other items – up by 58 percent to $270 million. There are number of smaller segments of exports that are developing and one of these could become sizable in future.
Textile exports are up by 35 percent to $5.7 billion in 4MFY22. This is growing over 12 percent growth last year. There is a pickup in both low and high value-added products. Most of these are due to better cotton prices and its impact on the value chain. In some cases, PBS is showing decline in volumes while the value in dollar items is growing. Well, that was the case last year too. Not all the increase in 4MFY22 is due to price, as better-quality items could well have been replaced with others.
There is nothing significant to talk about many other items of exports. Overall export growth is decent at 32 percent. However, the exports quantum is too small to not let the trade deficit to slip by 103 percent to $13.8 billion – this is the highest deficit both in value and as a percentage of GDP. Naturally, there is more cushion for the economy. The growing star is the ICT exports – up by 40 percent to $830 million. This growth is over a high base as in FY21 for ICT service exports which were up 47 percent. The potential is huge in terms of demand; the key is to find the right human resource. And this sector doesn’t need tons of subsidies like the textile boys are used to. Overall exports services are up by 25 percent to $2.1 billion.
Import services are up by 29 percent to $3.1 billion in 4MFY22. Last year it was low due to lower travel and the number is growing with travel opening. The overall goods and services trade deficit is up by 97 percent to $14.9 billion. The worker remittances continue to grow over high base – but the growth is tapering off – up by 12 percent to $10.6 billion
The overall picture is not good. But going forward, the current account deficit could be a little less severe due to price and tightening effects. The key risk remains any further increase in international commodities prices.
Comments
Comments are closed.