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BR Research

Current account surplus

The current account is in surplus in Oct-19, for the first time since Apr-16. It was bound to happen as the tighteni
Published November 20, 2019 Updated November 21, 2019

The current account is in surplus in Oct-19, for the first time since Apr-16. It was bound to happen as the tightening has slowed down the economy substantially, and in winters import pressure is usually low due to less demand of power. The depressed commodity prices also helped the cause. This was relatively an easier economic task; politically tough, though. The tough nut to crack is fiscal where structural challenges are on tax revenues, leakages, and energy circular debt. Without, resolving those, it will be tough coming out of so called four-year artificial growth cycle.

And to have higher tax revenues, economic growth has to be revived sooner than later. It is time to re-strategize the economic policies to unleash the growth. IMF’s full year forecast of CAD is $6.7 billion (2.6% of GDP) while the number is $1.5 billion (1.6% of GDP) in 4MFY20 – at this pace, government can let the imports grow a bit for boosting growth.

The SBP may not ease the monetary policy too early because of inflationary pressures, but can reduce the non-tariff and tariff barriers. Payment against imports restriction is relaxed, and there are talks on abolishing raw material on pharmaceuticals. Government should think on automobile growth where FED is further hurting an already suppressed sector. The SBP Governor said a few months back, that to have lesser cars assembled is a designed policy to curb imports of auto parts, but that is eating employment and tax revenues too. This policy may need rethinking.

The imports stood at $14.6 billion in Jul-Oct19, down by 23 percent – at this pace full year imports would be around $41-43 billion. In FY18, the number was $56.6 billion. Not much juice is left in curbing imports. The focus should be on exports. Everyone last year was too impatient on exports after continued currency depreciation. The policies continued by current economic team, are reaping fruits now.

In absolute numbers, the exports are up by mere 3 percent to $8.2 billion in 4MFY20, but volumetric growth in key exporting sectors is encouraging – the value is low as the unit prices depressed due to global economic slowdown. Based on PBS data on volumes for 4MFY20, rice exports are up by 43 percent, fish by 22 percent, meat by 57 percent, bed wear by 19 percent, knitwear by 7 percent, readymade garments by 32 percent, leather garments by 38 percent and footwear by 52 percent. These are the highlights of top performing exporting sectors.

Talks with top textile exporters in the country suggest that the orders are more than the capacity of the industry to deliver. Every big player is in the process of expansion. Exchange rate, energy price and interest rates for them are now at regional competitive rates. The exporters are in appreciation of economic team for providing the level playing field.

The value chain up to fabric is competitive or perhaps at an advantage to Bangladesh, the problem is in garments where the wages in Bangladesh are at 15-20 percent discount - having higher participation of women in labour force can partially solve this problem. World top economists believe that one of the reason for higher growth for Bangladesh is by enhancing women participation in workforce. Pakistan can tap this in South Punjab or in Karachi, Lahore and Faisalabad by having garment factories dedicated for female workers in congested places. That may require some training institutes for women to acquire skills.

The encouraging element for exporters is that the buyers are coming back in the country after many years. The currency adjustment in 2008 did not reap fruit for textile exports as security situation was worsening and energy shortages were increasing. Now the buyers are looking for new market in the aftermath of US-China trade war.

Pakistan is well suited to take benefit. Bangladesh market is saturating and buyers want diversification too. Indian textile players are now looking inward to capture building middle class there, Vietnam is more inclined to capture high value added sectors such as electronics. Pakistan is to compete with Cambodia and African economies, and the market is here for capture. Textile annual exports can reach $20 billion in 3-4 years (see: Textile is ready to take off). The industry players are confident, this can happen.

But the main caveat is to ensure the key raw material - cotton. The cotton crop is not good this year and industry estimates around $2 billion imports of raw cotton in coming season. There are issues of seeds and without having stewardship of multinationals, and ending the hegemony of numerous seed companies, the textile sector potential may not be realized.

Apart from textile, other areas of exports are to be explored such as light engineering sector. There are signs of import substitution in some areas. The government should support these sectors too for diversification.

The bottomline is to shift the strategy from import compression to export promotion, and import substitution. The need is to create employment and economic growth. Stabilization is here, but a long way to go to ensure quality sustainable growth.

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