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The current account deficit stood at $400 million in Dec-22 and $1.2 billion for the second quarter – down by 78 percent. The decline is welcome. However, it does not come without a cost. SBP has suppressed the imports through L/C restrictions, which has its own dire consequences in terms of job losses and industry closure. The current account position could have been better had the remittances not fallen due to the growing gap in exchange rates between the open market and the interbank. The costly gains from L/C restrictions are partially being wasted due to the fixation of FM on the exchange rate.

Imports of goods are reduced to $4.2 billion in Dec-22. The number used to be north of $6 billion prior to L/C compression. At the same time, remittances are down to $2.0 billion -the lowest level since May 20. The number was $2.5 billion in the same month last year. The decline is mostly due to the shift of inflows to the informal market. And that gap is partially financing imports coming through hundi/hawala and the rest is being used by hoarders, while the flows in the interbank market are drying up. The decline in the remittances is only speeding up, based on the channel check from banks, the remittances in January are expected to be around $1.7-1.8 billion. Running two exchange markets is costing heavy.

The story of the current account is not fascinating anymore. The impact of policy actions – such as interest rates and exchange rates, efficacy is overwhelmed by SBP’s administrative control on imports. Back in July 2022, SBP issued a circular to restrict imports of engineering goods to a 50 percent quota of last year’s average monthly imports. The policy was implemented because Islamabad was not ready to have energy and other conservation plans. And that is how to import restriction started.

With every passing month, the restriction on grounds started growing, as SBP reserves started falling. Import payments averaged $5.5 billion in the Jul-Sep quarter as compared to $6.2 billion in the previous quarter. And after more restrictions, the number is down to $4.4 billion in the last quarter. From January onwards, the onus to control imports is shifted from SBP to commercial banks who have now become the villain. Now even raw material imports in most of the industry are curtailed and, in many cases, there have been no L/Cs opening at all in the last two weeks. Importers are agitated. First, there were protests against banks and now the business community is taking SBP to the task. The question is who is next in line, as there are no dollars to allow these imports.

On Dec 22, non-oil and non-food imports are down by 45 percent from the same period last year. Most of the decline is due to import suppression. However, now demand has gone down enough to keep non-essential imports at lower levels. For example, CKD car imports are restricted to 50 percent while for many players, demand is even lower than that. But the problem is now that the 50 percent quota is hard to import as well.

In January, raw material imports for chemicals and construction (such as steel) are being constrained. And that would result in more industry and construction projects closure and that would result in more job losses. Then the food and oil imports are down by 15 percent in Dec-22 -YoY. This is now under stress. L/Cs of these are now being scrutinized as well. This could result in fuel shortages and massive load shedding in the coming summer.

The bottom line is that the import situation will remain bad till we get back to the IMF program and have dollars in the kitty. As of now, the SBP reserves are perhaps below $4 billion – not to cover one month of constraint imports. And this could reach almost zero in two months without inflows.

One cannot emphasize enough on growing exports, remittances, and other inflows in the current and capital account (such as RDA). The problem with exports and remittances is that two exchange rates are reducing the flows. Exporters are keeping money outside as much as they can to fetch better value in PKR after the conversion of dollars, as they expect the interbank rate to eventually fall. And the remitters are opting for informal channels.

Another reason for lower exports – down by 21 percent (YoY) to $2.3 billion in Dec, and down by 15 percent in the 2QFY23 (YoY), is less availability of raw materials due to restrictions in imports. This situation is not likely to get better without dollar inflows. Then the cost of energy and working finance is getting dearer for exporters and many units are now closing. The exports are expected to decline further in January.

Hence, both exports and remittances are falling. That would choke the imports further. The country needs financial and capital inflows in the balance of payment to normalize the current account. Financial account flows can improve by going to the IMF as this would pave the way for new loans to replace old ones. Meanwhile, in the capital account, SBP should improve the rate of return on the Naya Pakistan certificate to increase RDA flows. The exchange rate should converge in both markets to lower the hoarding demand, and this can result in an inflow in the interbank through exchange companies. To counter depreciation in the interbank, SBP must look at the interest rate – expect a 100 bps increase in the policy rate in upcoming monetary policy.

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