Another month of current account surplus but without CSF support this time around. The surplus thinned to $163 million in March from $872 million in February and the difference is explained by $717 million of Coalition Support Fund in February. Rest is attributed to falling oil prices and growing remittances. Current account deficit for 9MFY15 is reduced by 46 percent to $1.5 billion and the third quarter has shown a surplus of $961 million.
Oil prices started falling sharply in the second quarter, but its impact on imports came with a lag. The gradual improvement in the current account is demonstrating it – in the first quarter, there was a deficit of $1.7 billion followed by a deficit of $770 million in the second quarter and $961 million in the third. Adjusting for CSF of $1.45 billion (divided into the second and third quarter), the gap marginalized.
The fourth quarter may show a balanced current account as oil price may well have hit its bottom in the third quarter and is slightly moving up lately. If it consolidates around $60-65 per barrel, the picture is not that bad. In the absence of more CSF flows, the full year deficit may hover around $1.5-$1.7 billion (0.5-0.6 % of GDP). That is a much better picture than feared at the start of this fiscal year.
In March, the goods ‘exports grew by $185 million (10%) from last month to reach $2.05 billion while the imports grew by 13 percent ($360 mn) to stand at $3.13 billion. The trade deficit reached at $1.08 billion in March and in the nine months, the toll is at $12.75 billion as compared to $12.48 billion previous years. The benefit of falling oil prices impact is not truly improving the trade balance, as the fall in exports (3% to $18.1 bn) eroded the benefit of one percent decline in imports ($31.2 bn) in 9MFY15.
The situation has marginally improved by a lower deficit in services trade – $1.38 billion as compared to $2.12 billion in the same period last year. Thanks, to higher receipts of CSF flow, which may die down in next year or so.
The overall trade balance for 9MFY15 was recorded at $14.13 billion as compared to $14.61 billion in the last year. The robust growth in remittances continued to lower the current account deficit. Home remittances are up by 15 percent or $1.74 billion in the nine months to stand at $13.33 billion. In a nutshell, lower commodity prices and higher CSF flows have restricted the growth of trade balance while the remittances boom continues to ease the CAD. If oil prices remain modest and remittances carry momentum, the current account may show a surplus in FY16.
But there are serious challenges on the continuation of double-digit growth in home remittances which has grown manifolds in the past few years. The boom in the Middle East and Saudi’s preference of having Pakistani employees, coupled with the PRI reaped fruits.
But this government is seemingly not convinced on the benefits accrued from PRI and is not only delaying payments of the rebate to banks on remittances charges but is also deliberating to reduce the benefit by 5 Riyal to 20 Riyal. That’s not a good sign, as there are other impediments to the high growth of inward money as the fall in oil prices might impact the growth in Middle Eastern economies in the medium term. The Yemen crisis may also create some troubles, to make matters worse.
The exports are not really diversified and there are growth bottlenecks in traditional textile items while the domestic supply is constrained by energy shortages. That is why, despite the fall of 12 percent in oil imports in 8MFY15, the overall imports are stagnated.
This all calls for further incentivizing remittances to have a sustainable foreign exchange reserves growth. But for the short time, reserves are going up and that probably is blindfolding the finance ministry from benefits of an initiative like the PRI. Due to current account surplus and one-off flows, despite drying foreign investment, the foreign exchange reserves are growing. The SBP’s reserves were up by $1.1 billion to $11.6 billion in the third quarter. And the fourth quarter is bringing even better news, as the HBL money inched up the SBP reserves to $12 billion and overall country reserves have crossed $17 billion.
This article originally appeared on April 20, 2015 in Business Recorder (BR) Research.
