Current account outlook better – or is it?

Current account has almost been balanced in March; and is likely to be marginally in surplus during Apr-Jun. The projections are fluid and are subject to change based on new information flow about cases (lockdown) in Pakistan and trading partners. The impact is also dependent on commodity prices which in turn are linked to opening up of the world. Having said that, one cannot say that improvement in current account balance is good for Pakistan. Economies flourish on higher trade flows not vice versa. COVID is bad for any economy as economic activities are reduced and jobs are lost in the process. Pakistan is no exception.

Current account deficit in 9MFY20 stood at $2.7 billion – down to one fourth of what it was in the same period last year. That number has very little to do with COVID. Lockdown started in the mid to end of March and real impact would be visible from April. Imports were already coming down owing to tightening policies the government has adopted over past year, albeit exports pick up was slow. Commodity prices were already heading south before a free fall due to COVID.

In March, imports were down by 9 percent (from Feb-20) to $3.3 billion. The decline is 20 percent from Mar-19. 9MFY20 imports are down by 16 percent. Now with COVID, imports are likely to nosedive in the short run. April would be the month of slowest import (assuming lockdown to remain flexible now onwards, else the fall shall continue in May). Barring food and agriculture, all other imports are likely to remain well below the usual levels.

Many industries either remain closed or are operating at suboptimal level. Machinery imports are expected to be less than half as not many are eager to expand. Transport group imports are even worse. The imports are mainly of parts to manufacture, and not many plants are even partially working.

The fate of petroleum imports is similar. With public and air transport at a virtual halt and retail chain (apart from essentials) not fully functioning, the consumption of energy will remain suppressed. And the price in this category is most favorable in lockdown. The story of textile, metal and other groups is no different. By conservative estimates, imports could be a third of the usual in April.

Exports’ fate is probably worse. Pakistan (barring food and healthcare) mainly export non-essentials. Textile constitutes about three fifth of country’s goods exports, and they are not looking good at all. The worst hit is apparel where even confirmed orders are being cancelled or on hold. In other areas, new orders are hard to come by. The country’s main exporting market is West (Europe and US) and these countries are worst hit.

There is some demand of bedlinen and other textile products in healthcare use. Conservative estimates are that exports will shrink to one third, if not to one fourth. Numbers could vary as payments of already delivered or shipment of old orders can inflate the numbers in April. The story of other manufacturing items is no different. Overall exports are expected to be down by 25-30 percent.

Since the imports are 1.8 times of exports in 9MFY20, the decline in trade balance is favorable. Assuming exports are down to a fourth and imports to a third, the trade balance of goods will shrink by more than half. This can be extrapolated for Apr-June quarter – assuming imports are down to half and exports to a third, the trade deficit may shrink by 30 percent. It is no brainer that trade balance of goods may improve in days of COVID.

The story is better looking in case of service trade. The imports of services are based on transportation of goods imports and travel abroad. With low goods imports, transportation cost will decline proportionately. Travel is virtually zero, so more savings are in imports of services. The case is different for exports of services. It is one of the few sectors benefiting from lockdown of physical world. Anecdotes suggest that there is pickup in demand of export services.

In March, exports in services remained in the normal range (down by 5%) at $449 million (monthly average of 8M - $475mn). On the flipside, imports are down by 18 percent to $624 million (8MFY20 monthly average - $758mn). The will help improve overall trade deficit in goods and services.

The remittances remained resilient to COVID in March – up by 4 percent on monthly basis and 9 percent on yearly. Understandably so. The lockdown in Mid East and bearish outlook of oil in the medium term would have a sustainable dent in remittances. But these may remain solid in the short term. Eid and Ramzan are seasons of high remittances. Those who are even unemployed may send money back from savings to others at home, where livelihood is dependent upon remittances inflow.

Once the life opens across the world, there will be some permanent or medium-term adjustments. The oil rich and tourism dependent economies will be worst hit. This many result in some layoff of Pakistani workers in GCC and the flow of new workers may reduce. At that time, imports and exports will return to normalcy.

The story is simple. Commodity prices are expected to remain low in lockdown and trade flows to remain half to one third. Services trade balance should improve and so shall the overall trade balance. Remittances may remain sticky in this quarter before adjusting to new norms (at lower levels). Thus, the current account is likely to be in surplus in Apr-Jun.