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Signs are becoming clearer that the economy is entering a recovery phase. The slowdown has bottomed out. 2020 dawned with commercial activity picking up. In Dec-19, LSM is in green after many months of straight decline. Current account deficit is up to $555 million in Jan-20. It was $607 million in Oct-Dec 2019 – slowest quarter in this recessionary run. Inflation peaked out in Jan-20 – SPI reading suggests that month on month CPI may be negative in Feb-20.  Anecdotes suggest some movement in informal market such as property transactions gaining traction in DHA phase 8 Karachi, and so-called own money on new cars sale is back. Stock market has already boomed in anticipation.

It was largely perceived that higher interest rates are the prime reason for economic slowdown. The argument is a bit misplaced. There is no doubt that higher rates have dented demand, but it effects come with a lag. The interest rates peaked in July and it almost coincided with the trough. One must not forget that documentation spree has its impact too. The fear factor was paramount. Now with some give and take, the economy is in search of a new norm. The economy will slowly recover even though interest rate may take some time to change gear. Invariably, its natural tendency of economy to now bounce back. The import compression has reached its inflection point as it happened in 1998 and 2008-9.

The recovery comes with a cost. The current account savings will marginally be eroded due to pick up of imports. The CAD stood at $2.7 billion (1.6 percent of GDP) in 7MFY20, down by 72 percent.  The trade deficit of goods and services is down by 34 percent to $13.6 billion.  Worker remittances are up by 4 percent to $13.3 billion.

Imports

Imports stood at $3.9 billion in Jan-20 as against average monthly import bill of $3.7 billion in Jul-Dec. The rise in imports is not alarming as such. PBS data is showing $4 billion plus monthly imports for two consecutive months. The highest increase is in mobile phone imports. This has picked up after duties were relaxed on cheaper smartphones to encourage usage for enhancing digital footprint. Signs of economic recovery are visible from pick up in CKD (parts) automobile imports.

According to PBS data, food imports are down by 12 percent in 7MFY20. Tea volumetric imports are down by 12 percent and the value decline is 21 percent as price moved in Pakistan’s favor. The story of palm oil is similar where volumes fell by 2 percent and dollar based imports are down by 9 percent. The third biggest food item is pulses where in tonnage imports are up by 7 percent but due to lower prices, dollar based import is down by 4 percent.

Machinery imports are up by 1 percent in Jul-Jan. Most categories dipped significantly – such as textile, office, construction and agriculture. Electric machinery and apparatus is up by 37 percent. This implies that there is some expansion taking place in engineering sector. The highest uptick is in mobile phones – up by 79 percent. It’s not essentially a machinery but is categorized in the segment.

Tania Andrus pushed policy makers to lower duties on mobile phones costing less than $500 per unit to have more consumers switching to smart phones. That is a right approach; but this is hurting a nascent smartphones assembling industry. It is a labor-intensive industry and is moving from countries such as China where labor is becoming expensive to India, Bangladesh and others. Pakistan has to capture this market before it’s is too late.

The economic recovery story can be derived from movement in transport sector imports. Though it’s down by 45 percent in 7MFY20, January data has a tale to tell. CKD imports are up to $90 million in January as against monthly average of $53 million in 1HFY20. Imports have picked up in cars. This means more auto parts are imported to assemble more cars.

Petroleum imports are down by 18 percent in 7MFY20. Price is moving in Pakistan’s favor as both crude and petroleum products volumetric imports are down by 11 percent each while in value terms the fall is over 20 percent. The advantage of lower prices is missed in RLNG which is one fourth of the energy imports. Its spot prices nosedived, but long term contract with Qatar has bounded Pakistan to buy almost 85 percent of need at a higher price.

As expected, cotton import is picking up. Poor cotton crop has its ramification on external account. $108 million amount of cotton is imported in January. Industry is expecting $1.5-2 billion of export in this year. Improving cotton seed quality should be of top agriculture priority.

Plastic imports are picking up. It is used as a raw material in various industries. In tonnage it is up by 4 percent in 7MFY20 (21 percent in Jan). Due to low prices, value is down by 10 percent. Iron and steel products are yet to pick. Metal group imports are down by 20 percent in Jul-Jan. Now with recent releases of PDSP funds, next wave of growth is to come from imports of iron and steel to build infrastructure.

Exports

Exports are up by mere 2 percent or $306 million to $14.4 billion in 7MFY20. In Jan, it was down by 3 percent from Dec-19 and the decline is 10 percent from Jan-19.  Exports did pick up in this year in tonnage; but lower prices kept the volume growth tamed. However, volumetric decline in star performers during Jan could be attributed to 10-12 days transporters strike. Shipments were delayed for exporters from up north. The trend will normalize in Feb as there could be some pick up in it.

The problem in textile exports could come if the Coronavirus does not get in control. For garments and other value added products raw material like dyes, buttons etc are imported from China. There are some inventories maintained by importers. Its impact could start reflecting in April.  The other issue could be of liquidity as refunds are still stuck and energy cost moved up as government withdrew the support of providing electricity at 7.5 cents per unit.

Having said that, reportedly textile industry is running at its full capacity. With travel advisory being removed buyers are coming in and there are more orders. Government has removed levies on import of cotton. Industry is in the process of expansion. Government has to have swift process of refunds and more importantly ensuring energy provisioning at regional competitive rates.

Food group exports are up by 7 percent in 7MFY20 (PBS data). Champions are Basmati rice, fish and meat. Textile group is up by 4 percent to $8 billion – it constitutes 60 percent of exports. The growth is in value added sectors at the cost of yarn and cotton cloth. In Jan there is decline in volumes of value added due to delayed shipments. Pattern is similar in other manufacturing including leather, footwear and sports goods.

In order for the economic recovery to not prove a déjà vu of last decade, it is imperative that the coming growth is sustained by FDI inflows, which in January-20 fell under $250 million. Recall that higher FDI flows in previous months turned out to be one-time telco related flows. Robust recovery is contingent on non-debt foreign investment, which will allow domestic capacity to develop and integrate into global value chains, eventually producing positive spillovers for exporting sectors.