Current account surplus continued for the sixth consecutive month. Less travel due to COVID is the saving grace. The benefit of very low oil prices is fading away. Non-oil imports are picking up due to better economic activities, and soon machinery imports will also pick up. The conversion of informal remittances to formal continued. The party is yet not over.
The current account surplus stood at $1.64 billion in Jul-Nov20 ($447mn in Nov) versus a deficit of $1.75 billion in the same period last year. Exports are down by 7 percent to $9.56 billon. In Nov-20, exports are up by 14 percent from Oct-20 to stand at $2.3 billion – highest since May-19. The imports are moving up at a faster pace – In Nov imports stood at $4.1 billion (up by 18% MoM) – also the highest since May-19. July-Nov imports are down by 1 percent to $18.2 billion. The overall trade balance has worsened by 7 percent in Jul-Nov to $8.6 billion.
The savior is obviously home remittances – up by 27 percent to $11.8 billion in 5MFY21. The average increase per month in days of less travel is Rs500 million (and $150 million in donations and charity) – and the current account average monthly surplus is $400 million. The real question is how long this improvement in remittances will continue. What will happen when the pandemic is over. There is fair chance that some of those who have experienced the formal channels for the first time, will continue using it. And the curb of informal channels is growing.
Apart from remittances, less travel is reflecting in lower services import. This is related to buying air tickets and travel packages. The services imports are down by 18 percent or $697 million in Jul-Nov – almost all due to less business and personal travel. People are craving for vacations, and business ventures are delaying. The pent-up demand is building up.
Non-trade surplus would remain healthy till the travel is low. Imports are picking up fast as the economy is recovering. All kind of consumers’ goods sales are picking up. This is reflecting in the numbers: cars imports are rising fast; mobile phones growth is the highest at 45 percent.
Poor crops at home are eating up foreign exchange -$376-million-dollar worth of raw cotton is being imported. Over $400 million dollar are spent on wheat imports. These two items are not regular imports. But they may become from now on. Palm oil imports are up by 30 percent – the supply disruption earlier this year is creating shortage. Prices have moved up further in December. Even overall global food price index is at its 7-years high.
There is some pick up in machinery imports – mainly in power generation. Construction imports are growing. So is the case of agriculture machinery. In months to come, the impact of SBP concessionary finance facility (TERF) on plant and machinery imports in textile and other manufacturing to be visible. Rs238 billion amount of financing is approved (mainly BMR) for 313 projects.
The petroleum group imports are down by 23 percent. Low oil prices are the rescuer – Brent oil prices are down from $62 on average from Jul-Nov-19 to $42 in Jul-Nov-20. However, it has crossed $50 in December, which will bring some strain. RLNG imports are already up. There is tight market and Pakistan didn’t book spot cargos well in advance. This winter is harsh on RLNG.
The imports are likely to remain north of $4 billion a month. Exports pick up is marginal. It will sustain around $2.2 billion a month. With 15-20 percent capacity addition within 12-18 months, this will go up to $2.6 billion. The good thing is that in textile the growth is in value added sector while the yarn and cloth exports are falling. This is implying that the material is processed into garments and home textile for exports.
The fear is what will happen if the remittances upbeat growth ends. Or when the travel related services imports start growing. There is a decent growth in services imports to fill in the gap. The potential is huge and SBP is taking steps to ease the movement of funds overseas to bring higher amounts parked outside back home.
The bottomline is that the current account is most likely to come back in deficit. As long as the deficit is under $500 million a month, it’s manageable. No worry in sight for at least the next 6-12 months.