For the country’s external accounts, the month of October produced some mixed results. Though the current account deficit during the month narrowed by 46.5 percent over the previous month of September, the balance of payments plunged into a deficit of 447 million dollars, almost 10 times the September level. Hence, a relatively smaller first quarter BOP deficit got enlarged to 470 million dollars in first four months.
Current account balance is in better shape, clocking in a surplus of 258 million dollars in 4MFY13, as compared to a whopping deficit of 1.65 billion dollars same period last year. Improvements have been visible on a number of counts. Firstly, the four-month trade deficit narrowed down by roughly 400 million dollars relative to last year, thanks to a nominal YoY growth of 1.3 percent in exports and a 2.17 percent decline in imports.
If it weren’t for the fact that in October, the month-on-month imports growth was 3.3 percentage points more than the exports growth; the current account balance would have improved more. More support came from the services surplus of 44 million dollars. Hence, the overall good and services deficit was reduced by 1.4 billion dollars in 4MFY13. This figure reflects the windfall CSF payments of 1.2 billion dollars in August.
Sustainable remittance growth may still be a pie in the sky, but overseas remittances have singlehandedly wiped out Pakistan’s entire trade deficit during the four-month period. Workers and overseas Pakistanis have been breaking their own records, this time sending in October the largest monthly remittances ($1.36 billion). At this pace, annual remittance figure of 15 billion dollars seems achievable.
SBP data shows that remittances increased from all repatriating regions, with strong growth from the ME where an overwhelming majority of Pakistanis resides. While the October remittance surge could be explained by a culmination of Eid festival and early wedding season, next couple of months may show similar promise as expats’ holiday plans materialise and the winter wedding season goes into full swing.
This is where sunshine dissipates and gloom starts circulating. In the past, it wasn’t a big problem to finance high levels of current account deficits due to sizable inflows in the Financial Account. But that has changed lately, and Pakistan has begun to experience major headache on this front.
Direct investments were down by a quarter during 4MFY13, while portfolio investments increased two times over same period last year. However, the real deterioration in the financial account position is due to the drying up of project loans, programme loans, bilateral grants, etc. Another factor is that banking outflows in October have remained on the higher side, possibly due to the bank’s foreign repayments and transfers to their nostro accounts.
Though the 4MFY13 balance of payment position looks fine compared to last year, significant pressures persist. Due to the IMF loan retirement, the central bank’s gross reserves have slipped to 10.9 billion dollars. Rupee is under severe pressure, and the SBP’s ability to reverse the currency slide is said to be waning. According to IMF data, Pakistan is scheduled to retire to the Fund on November 21, some 258.425 million SDRs (or $393.78 million as per November 16 SDR valuations).
Moving forward, Pakistan’s textile exports are expected to do well (despite the global depressed prices), the domestic market conditions continue to force the Chinese textile mills to import the duty-free cotton yarn from Pakistan and other countries. Oil import bill will be dependent on country’s seasonal demand and any short-term spillover of the Gaza conflict into an otherwise stable oil price outlook.
As pointed out earlier, financial account has to be the main worry of the authorities. Financial inflows matter, more than ever now! All possible avenues should be exhausted to avert a BOP crisis down the road.
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Key items: Balance of Payments
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(million $) Oct FY13 4MFY13 4MFY12
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Current account balance (177) 258 (1,655)
Exports 2,216 8,210 8,105
Imports 3,585 13,210 13,503
Workers Remittances 1,365 4,964 4,315
Financial account (311) (344) 116
Direct investments 125 244 324
Portfolio investments 10 122 (102)
Overall Balance (447) (470) (1,394)
SBP gross reserves 10,908 10,908 15,095
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Source: SBP