The current account is finally in deficit after a surplus streak of 5months. It stood at $662 million in December; and a surplus of $1.13billion in Jul-Dec. The economic activities started picking up from July2020 as lockdowns in Pakistan were over earlier than in other countries.
The low commodities prices kept imports in check. Exports were low in 1QY21(Jul-Sep), and so were the imports. In the second quarter, both changedgears. Naturally, the import increase in dollars is much higher thanexports – resulting in slippage of goods trade deficit.
Less travel has lowered the services imports and work from home phenomenonboosted the IT services exports (or the proceeds are now coming from formalchannels). The slippage in goods trade deficit is partially compensated bylow services deficit. There is some pick up in primary income debit inDecember as companies are sending higher dividends at year end – a usualcase.
The low travel and conversion to formal channels have kept the remittancesand other current transfer growth upbeat – a well-established Covid-ledlucky break. However, the uptick in goods imports in December was enough toshow a significant deficit.
The snapshot of 1HFY21 is depicting that barring remittances, servicesimports, and other current transfers; the other elements of current account– mainly goods imports and exports are worse off from last year. Goodsimports are up by 5 percent to $23.2 billion, and goods exports are down by5 percent to $11.8 billion. The goods trade deficit worsened by 17 percentto $11.4 billion.
In December, imports crossed $5 billion (SBP data) for the first time sinceJuly 2018. The oil prices in Jul-18 were 22 percent higher than Dec-20.This implies that non-oil imports pick up is higher. The main culprit isfood items. Detailed numbers are not yet published.
Based on PBS data, one can safely conclude that food imports are biggestcontributor in growth – up by 86 percent YoY in Dec (52 percent in 1HFY21).Wheat and sugar imports (not usual import item) and hike in palm oil prices(due to global supply chain disruption) are the main contributors. Theseare going to normalize as wheat/sugar imports would end sooner or later andpalm oil prices are already showing signs of normalization.
Soon machinery imports would show growth. These are up by 2 percent inDecember and 4 percent in Jul-Dec. The biggest contributor is imports ofmobile phones (though it’s not machinery but is recorded in that section) –it contributes 22 percent of machinery imports in 1HFY21. Mobile phoneimports reached $215 million in Dec (higher than cars CKD and CBU imports)– up by 82 percent in December and 52 percent in Jul-Dec.
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The increase is attributed to implementation of DIRBS (DeviceIdentification Registration and Blocking System). Although, it was launchedin 2018, the impact is becoming visible in FY21. At the time of launch, theimporters showed inflated inventory to avoid taxes on (near) futureimports. Now the real import numbers are depicting themselves. With smartphone manufacturing to speed up in Pakistan, this number will fall inquarters to come.
However, the machinery imports will grow in quarters to come due to successof SBP’s TERF (Temporary Economic Refinance Facility). The approved loansreached at Rs300 billion and a higher amount is requested but not approved.This facility is expiring in April. It is expected to have an impact ofaround $2 billion on machinery imports in next 12 months or so.
The transport imports are growing fast – up by 35 percent in 1HfY21. Lowerinterest rates, launches of numerous new cars are driving imports in thissegment. The number in January-March shall be higher as there were delaysin import orders. Moreover, numerous CBUs are stuck at ports. The numberwill keep on increasing till the SBP revises up the interest rates.
The relief is coming in petroleum imports – down by 22 percent in 1HFY21.This is due to low oil prices as prices in 1HFY21 are down by 30 percent.The oil prices are moving up fast. The economy is picking up too. Soon thepetroleum imports will move up. Another pain is growing raw cotton imports(reached $532 Mn in 1HFY21). This is to feed growth in textile exports.However, just like wheat and sugar, cotton imports are growing. Pakistanimported $1.3 billion worth of these three commodities in 1HFY21 – thenumber was mere $88 million in the same period last year.
The story of exports is shaping well. Based on PBS data, Pakistan textilerecorded the highest ever monthly exports ($1.4bn) in December. But the SBPdata is depicting a decline in exports in 1HFY21. Food exports are down by8 percent. But textile exports are up by 8 percent. Within textile, thegrowth is in the value-added sector – barring cotton cloth and yarn, thetextile exports are up by 15 percent.
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