Current account reading in COVID times

The Current account deficit (mainly imports) did not fall like the economy did in April due to lockdown. The impact comes with a lag, and the numbers may demonstrate the slowdown in coming months. The deficit cannot be that low; but imports to surely be less in May. The story of exports would be similar. In April, the CAD stood at $572 million versus mere $9 million in March. The ten-month CAD fell by 70 percent to $3.3 billion (1.5% of GDP).

COVID came at a time when Pakistan economy was going through a surgical slowdown and imports already fell by 17 percent in 10MFY20. There is not much room left in imports to go further south. The story of exports is rather scary where the tally was gradually picking up; and now the shock has pushed it back. It fell by 24 percent month-on-month in April 2020; but the impact to come with a lag (PBS data is showing 47% fall in exports).  The remittances shown surprise resilience as it fell by mere 5 percent month-on-month in April 2020. Its fall probably has yet to be shown in official numbers.

Times are fluid. And the global lockdown has adversely affected our exports. On the other hand, most of our non-essential imports were already cut down; not much to benefit on that front. Low commodity prices will play both ways. Since Pakistan is a net importer, it will benefit more.

The export fall started in March 2020 due to two effects. One was that lockdown in exporting countries started earlier such as China, Western Europe and the US. Then the factories were closed from 23^th March in Pakistan due to lockdown. The impact is clearly visible from PBS data which is on shipment basis. The SBP data is on payment and it comes with a lag.

Based on PBS data, the exports fell by 15 percent (MoM) in March to $1.8 billion. At that time, exporters were catering to the orders already placed. The new orders were becoming miserably low in April, and there were incidences of cancelling of a few existing. Then the port activities remained low and factories were closed for about 1-2 weeks in April.  The exports fell further by 47 percent in April to stand at $957 million in April. That is 54 percent less than the toll in April 19.

SBP data (used for computation of current account) is not showing that dismal position yet. It stood at $1.4 billion, down by 24 percent on monthly basis. Since payments usually come after a lag, the low shipment of April would lead to lower export receipts in May and June. The story of shipment in May does not look encouraging. A few big exporters are saying that May could be even worse than April.

Things may normalize beyond July. But no one knows what ‘s that the new normal. A few buyers (stores and brands) of our textile exports are filing bankruptcies. Some more are to follow. Tourism is on decline. Demand of bed sheets and towels from hotels and motels is likely to fall. Generally, tourist spends on textile during travel.

The flipside is that US nationalist spirit to counter China economically will grow post-COVID. Pakistan partially exports yarn and cotton cloth to China. The value is being added in China before reaching final destination (US is the biggest costumer). Now that value addition business is on offing for Pakistan. There were signs of moving away from China in the US prior to COVID. This is to grow further.

Other manufacturing exports tale is similar. The silver lining is in food exports, which fell by mere 6 percent from March 20; but the fall was already visible in March (as demand from China was slow due to earlier lockdown). Rice is one rare item where exports actually picked up in lockdown. The lesson to learn is that we should focus more on agriculture value addition (apart from textile).

In case of imports, the lag is even in shipment delay. PBS data shows imports are down by mere 3 percent (MoM) in April. The imports already fell by 21 percent (MoM) in March, thanks to falling oil prices. In April imports fell by 32 percent (YoY). Still the number in April is higher. The demand in lockdown during April was miserably low for a few sectors but parts/raw material import did not fall proportionately.

For example, there were no car sales (and no production) in April as OEM plants were closed. But CKD car parts import increased by 44 percent (MoM) in April. Similar is the story of chemicals and many other parts imports. Imports work on LC openings and pending orders were being shipped in April. Now inventories are being created. The imports orders are likely to slow down and this will lower PBS import bill in May to around $2.3-2.5 billion. SBP payment based imports fell to $3.2 billion in April and that number will come down in May and June as well

The low oil prices are to play a role as well. Brent price averaged at $63.6/barrel in Jan and thereafter it’s on a slide. it fell to $55/barrel in Feb to 433/barrel in March and $23.4/barrel in April. RLNG import contract from Qatar is linked to Brent (with a lag), the benefit of which will start showing in May.

Thus, imports to remain around $2.3-3 billion per month in next 2-3 months before things to come to a new normal. The imports fall could have been a reason for lesser official remittances decline. Under invoicing in imports and smuggling is a known fact in Pakistan. The undeclared import amounts have to settle outside the official system through Hundi/Hawala system. Usually that amount is netted off through remittances sent bank home. No money to cross border. Since imports are down, there is no (or less) hundi/hawala option for unofficial remittances. These are probably then sent back through official channels.

The fact that Pakistan remittances fell by mere 5 percent versus over 20 percent decline in case of Bangladesh manifests that there is more to the story. Going forward, remittances are likely to fall due to job losses in the Middle East. That impact could be permanent. Imports are to pick up invariably if the economic growth is to pick up. The catch is in building exports in a new post COVD era.