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The current account deficit is down by 64 percent to $1.5 billion in the 1QFY20 – as expected, the average monthly deficit is now around $500 million. Sep-19 was better with monthly deficit down to $259 million. The prime reasons for decline are economic demand compression and depressed commodity prices. The outlook is positive, though bad cotton, rice and maize crops in the ongoing season can dilute the improvement.

The decline in imports is proving that the tightening monetary and flexible exchange rate policies are fruitful despite the adverse impact on job losses and fall in economic growth. The quarterly imports at $11 billion is lowest since 1QFY17 –twelve quarters low, and that is encouraging as in the previous two quarters, imports value hovered around $12-12.5 billion. It is safe to assume that the trend of declining imports is established. Yes, lower commodity prices are a big plus, and seeing the world slowing down further, the commodity prices outlook is gloomy.

The declining imports trend started from 1QFY19 as imports peaked at $15.2 billion in the 4QFY18. The first dent was mainly in machinery and food imports as the CPEC phase 1 ended and the non-essential food imports were replaced by domestic goods. Later, due to higher interest rates and massive currency depreciation, petroleum, metals and especially transport imports dipped where consumer financing has some role to play. The last quarter imports are low due to economic slowdown related to documentation efforts as well.

Textile imports, which never remained a big concern, can swell imports in quarters to come. The textile export in quantity terms is increasing and that requires higher consumption of cotton whereas the domestic crops outlook is not that good. But it’s an opportunity loss.

The problem of bad weather is adversely affecting exporting crops like rice as well – the volumetric growth, according to PBS data, is really encouraging for rice exports – over 50 percent growth in both basmati and other types of rice. The other food exports are marginally up, as the benefit of rice, fruits and vegetables, and fish is partially eaten by decline in sugar and wheat imports – the pattern is correcting to natural competiveness as undue price advantage to these two crops were eating up market competitive exporting agriculture commodities.

In case of textile exports, the quantitative increase, as per PBS, is encouraging and the benefit of currency adjustment is written on the wall. The five exporting sectors are by and large insulated from high interest rates, as they have excess of concessional lending. One unnoticed good point of this IMF programme is that low rates financing to exporting sector is continued; that was not the case in earlier Fund programmes.

In case of low value added textile, the US-China trade war has its toll – cotton yarn is up by mere 6 percent while the cotton cloth took a hit of 8 percent. This gives more opportunity to value added sector by accessing the US market bypassing value chain in China. For that second round of CPEC and FTA-2 with China are important. There is capacity constraint and a big few textile players are in the process of expansion – textile machinery imports increased by 13 percent in 1QFY20.

In other manufacturing exporting sectors there are healthy signs in leather, footwear, surgical and a few other sectors with small contributions. There are signs of import substitution in some of these industries where the overall impact of trade balance is higher. The goods trade balance is reduced by 40 percent in the 1QFY20 and the improvement thinned to 32 percent after incorporating trade in services.

The worker remittances could not carry the enthusiasm of the 1QFY19 where the change expectations were too high from diaspora on newly formed PTI government, and now with reality sinking in, the next jump in flow, perhaps, would come after success in reforms.

In Jul-Sep18, the remittances grew by 14 percent which was the biggest percentage jump since 4QFY15; and in Jul-sep19, the quantum is down by 1 percent to $5.5 billion.

The CAD of $1.5 billion is well financed by the capital and financial accounts, mainly debt, as the SBP foreign exchange reserves increased by $657 million to $7.9 billion –covering 2.2 months of imports; still a long way to go.