The current account is coming back to manageable levels in August – departure from a sudden spike in the last month. The deficit stood at $160 million, which is 79 percent less than the previous month’s deficit of $775 million. In July, deficit was higher due to clearing the backlog of payment, lower export and remittances proceeds (as senders were waiting in anticipation of currency depreciation or using informal market where rates were much lucrative). Now it has normalized, and the inflows (exports and remittances) are likely to improve further due to correction of USD in the open market.
The current account deficit stood at $935 million in 2MFY24 – down by 54 percent YoY. The balance in goods trade improved to a deficit of $3.9 billion from $6.5 billion in the same period last year. However, both imports and exports are falling – down by 26 percent and 8 percent, respectively.
Imports of goods stood at $4.3 billion in August- slightly increased from the previous month of $4.2 billion. However, in July, petroleum imports were too low (due to payment cycle) and that normalized in August. Barring petroleum, imports payment is down by 10 percent (MoM) to $3.1 billion. July was higher due to a sudden jump in imports via non-banks (contract-based import payment) which was $625 million in July (as compared to the previous 12M average of $230mn) and is back at $250 million in August. It appears that either the backlog has been cleared or part of is being postponed.
There is a slight pick up in imports across the board which suggests that SBP is easing the pressure on L/Cs where the restrictions were previously stringent. For example, machinery imports stood at $514 million on August 23, which is the highest number since August 22 and is 50 percent higher than the previous 12-month average.
Interestingly, there are imports in the machinery group (mainly of mobile phones) where payments are not being routed via the interbank. Mobile phone imports payments stood at $5 million in August ($8mn in 2MFY24) while PBS (and FBR data) is stating $111 million phones import in August ($179mn in 2MFY24). This implies that phones are being imported and tax has been paid on them while the payments are missing. The missing link is to connect with informal hundi- hawala market and that is one of many items due to which demand of dollars is fueling in the informal market.
There are other examples to quote. One is for CBU car imports where in the last two months SBP data suggests that $1 million is being paid while PBS shows imports of $31 million. And there could be several other examples. These payments through the informal market are usually netted through the remittances that have moved towards informal channels.
Home remittances are down by 22 percent to $4.1 billion in 2MFY24. Now with crackdown on smuggling and hundi/hawala market, the demand in the informal channels have evaporated (for the time being at least). Interbank and open market rates are converged (in fact interbank rate is slightly better for emitter).
Banking channels checks suggest that there is a significant uptick in the home remittances in the first two weeks of September. And the increase is likely to sustain as the government is focusing again on Pakistan remittances initiative (PRI). There is a subsidy mechanism in place where the government through SBP gives subsidy to banks for exchange companies of sender countries to compensate them for not charging fee to the sender. The amount stopped since Nov 22 and now the backlog is to be cleared up and new incentives might be in offing. Expect remittances to reach $2.5 billion (or more) per month going forward, as long as the open market rate remains in check and moves along the interbank.
Then the exports have been on the rise in the last week or so. Already, exports proceeds are better in August to $2.4 billion from $2.1 billion in July. However, it is still shy of 11 percent from $2.7 billion in Aug 23. Exports are likely to pick up in September as exporters are discounting in bulk. And there are signs of new orders coming in as well.
Overall, in the current account, there is likely to be growth in imports, exports and remittances – and SBP would keep on asking banks to manage their inflows and outflows which would imply the deficit to remain in check.