The current account deficit is slowly coming down. The toll stood at $1.0 billion in Mar-22 as compared to the average monthly CAD of $1.5 billion in the first eight months of this fiscal year. Last month (Feb-22) the deficit was a mere $0.5 billion. SBP is emphasizing in its tweet on non-oil current balance which is in surplus for the last two months. That is good, which means the unsustainable import numbers are coming down. However, this does not necessarily mean that there is demand curtailment. Early signs of demand curtailment are visible but economic slowdown happens with a lag and the situation would become clearer in a quarter or two. There is a confluence of many factors that are distorting numbers – such as commodity price super cycle and higher vaccine imports.
The prime reason for lower deficit in Feb was that imports were down to $5.1 billion. The number is up again to $6.2 billion in March – the average monthly imports in 9MFY22 stood at $6.7 billion. There is certainly a trend of arresting imports even though commodity prices are (mostly) moving north. In the first 7MFY2, COVID vaccine imports and some other elements were acting as one-off drivers. These are now normalizing.
The issue is that summer is coming, and the hydel power generation is low due to less water availability. The PTI government (rightly so) refrained from importing expensive fuel (such as, LNG on spot) in the last couple of months to keep the import bill in check. There is also a gap between electricity prices and the cost that was growing; the payments to IPPs were delayed and these companies imported less fuel. Now these payments are being (and in the process of being) made in anticipation of higher imports to keep supply in tandem to demand. Four cargos of LNG are precured on an average spot price of $27/mmbtu for May and June. This will add another $350 million in the import bill for the next quarter. All these will put pressure on imports and current account despite the aggregate demand expected to come down.
The good thing is that exports are growing. Both goods and services exports were at all-time high in March. Goods exports crossed $3 billion for the first time in the history of Pakistan in March 22. One must give credit to PTI for having export promotion policies and expect the new government to keep on supporting exporting sector. The higher momentum in remittances has also continued in Mar-22.
However, all these are not enough, given dwindling foreign exchange reserves. There has to have some breaks on imports. Commodity prices are not in favour. Economic demand slowdown will take time. There are not enough non-essential imports to curtail the bill immediately. That is why overall conservation and rationing is the need of hour. That is why importing RLNG at peak spot prices is not a wise decision. Government should take measures – such as longer Eid holidays, early closure of commercial centers and rationing of fuel for private vehicles to administratively control demand.
The increase in import bill is across the board. The food imports stood at $6.3 billion (up by 18%) in 9MFY22. The biggest culprit is palm oil – up by 44 percent to $2.5 billion in 9MFY22. On annualized basis, in FY22 palm oil imports are up by 1.9 times for that in FY20. There is not much growth in demand. It’s all pricing that has doubled the bill in two years.
The machinery imports are up by 23 percent to $7.2 billion in 9MFY22. The growth is primarily coming from private sector where manufacturing sector is expanding – mainly due to TERF and LTFF schemes, along with overall manufacturing friendly policies by the PTI government. The star performer is textile – whose imports are up by 80% to $966 million – and that is (and will) reflect in better exports numbers. The slowdown in observed in mobile phones – imports are down by 9 percent to $1.4 billion. Higher duty and localization are perhaps doing the trick.
The bumper imports are in transportation. The toll is up by 52 percent to $2.8 billion. The increase is in both cars and heavy vehicles. Car demand is not coming down despite limited financing, higher interest rates and growing car prices. People are buying perhaps also as a hedge against currency depreciation.
The freight cost of vehicles is sky-high. The CBU car imports stood at $240 million in 9MFY22 – highest ever number – 20 percent higher than the last peak of 9MFY20. CKD car imports were at $1.3 billion is 69 percent higher than last year which was the highest number at that time. With number of new entrants, the number of cars being sold is almost at the same level as 2018. However, the share of smaller cars is shrinking, and newer SUVsegment which has less localization is expanding. This all is putting strain on the import bill.
The biggest worry is the petroleum group – up by 90 percent to $12.7 billion in 9MFY22, thanks to higher prices and increasing reliance on imported fuels. Petroleum products (petrol and diesel) imports more than doubled. Since the government did not pass on the prices, it kept demand unchecked and the higher prices are only translating into higher imports, not on curtailing demand. Meanwhile, LNG imports more doubled as well to $2.3 billion and this number will grow further with higher spot purchases. And mind you, coal imports bill is not part of it. The growth in all the other groups has remained high but relatively tamed as compared to petroleum and transportation.
The story of exports is heartening. The toll has crossed $3 billion in March and 9MFY22 number is up by 24 percent to $23.7 billion in 9MFY22. The exports will easily cross $30 billion mark in FY22. The food exports are up by 16 percent to $3.8 billion and the growth is across the sector.
The star performer is textile group where the toll is up by 30 percent to $13.5 billion. The number is likely to touch $18 billion in the full year. Knitwear is the champion – up by 37 percent to $3.3 billion in 9MFY22. The export from this group is almost doubled as compared to what it was in 2018. Then the story of bedwear, readymade garments and other value-added sectors is encouraging too – over 20 percent growth in this year. Let’s hope this momentum continues and the new government does not come back to the tactics they had prior to 2018.
The services exports are doing good too- up by 17 percent. The star performer here is ICT. The toll stood at $1.9 billion – up by 30 percent and the exports have doubled in the past three years. The potential is huge.
Overall balance of trade goods and services stood at $33.2 billion – worsened by 56 percent, in 9MFY22. The remittances did well (up by 7% to $22.9 bn) – but not enough to match the growth of trade deficit and that is why CAD is growing. In the short term, the need is to curtail imports. However, for sustainability, the focus is required on exports – both services and goods.