The current account has shown a surplus of $424 million in July – highest surplus since Feb-15. This is fourth month of surplus since Oct-19, and third in the last four months. The recent surpluses are primarily attributed to COVID related slowdown, and higher remittances. In June, remittances were highest ever monthly ($2.46bn) and in July, further grew to $2.77 billion. Once the remittances normalize, and imports grow due to pick up in economic activities, the current account might be back in deficit.
Prior to the COVID, imports were coming down to an inflection point. In Nov-19, according to Optimus Capital report published in Jan-20, on 12-month rolling basis, ex-petroleum imports were down by 16 percent from its cyclical peak growth of 18 percent in Nov-17. The imports were supposed to pick up after Nov-19; and it did till Feb-20. Then COVID hit. Ex-petroleum imports now are almost at Nov-19 levels.
Assuming there is not another lockdown, imports will only go up from now on. Low interest rates and high powered leading indicators are showing, strong recovery in the economy. BR Research channel checks confirm that industrialists are seriously considering expansion and greenfield projects. This will put some upward pressure on machinery imports.
In case of exports, the recovery from COVID is largely achieved. Based on PBS data, exports in Jul-19 are over $2 billion which were reduced to less than a billion dollar in April. Since, prior to COVID, exports were operating almost at capacity, higher increase from current levels will take time. SBP data is showing July exports at $1.9 billion – down by 15 percent. On PBS data, knitwear, bedwear and towel, the quantity exported in July-20 is up by 14.5, 6.4, and 27 percent respectively, while the value growth stood in range of 20-25 percent. There is also an element of pricing along with higher volumes.
The decline is primarily in cotton yarn, cloth and in readymade garments. The first two are part of global value chains – mainly routed through China to the US. This chain is not fully restored, and may never, owing to growing trade tension between the two countries. Here the opportunity for Pakistan to add capacity in value addition to consume cloth and yarn home for making final goods to be exported directly. But this will take some time.
Thus exports growth potential beyond $2 billion a month is limited in the short run. However, imports have all the reason to go up. Pick up any economic sector, there is burden on the imports. Construction needs cement, steel and chemicals. Barring cement, all the raw material is import based and primary energy constituent of cement plants are imported too.
The value addition in automobile is low; and lower interest rates are increasing demand for cars. Earlier, assembling plants were closed, and lately these were operating on single shift. Now assemblers (especially Indus) are coming back to normal double shifts. The domestic supply chain is restored. Imports of parts will go up.
Mobile phones imports are picking up too. The average monthly imports of phones were $190 million in the last two months. This is higher than average monthly imports of transportation sector for last year. There are talks of Samsung to come up its assembly line in Pakistan. But initially, localization would not be more than 10 percent.
The petroleum imports are growing up in volumes. Intercity travel has increased – especially on long routes from south to north. On average, petroleum imports in quantity is up by 34 percent (YoY) in Jun-July. Crude import is down by 11 percent. The petroleum imports are likely to remain high.
The mystery is in remittances. 12 Month average remittances till May-20 were $1.9 billion. There after it moved up to $2.5 billion (June) and $2.8 billion (July). Some of the growth is explained by seasonality. Rest is probably due to moving informal remittances to formal channel as cross boarder movements are restricted due to COVID. On the other hand, there might be some downsizing from host countries in the gulf region. Once the dust settles, remittances may dip.
In a few months, remittances may fall, imports pick while exports would be sticky. The current account will be back in deficit.