CAD shrinks 71 per cent in eight months

[HAIDER]

KARACHI: Pakistan’s current account deficit (CAD) shrank 71.04 per cent to $2.843 billion during first eight months of this fiscal year compared to $9.817bn in the corresponding period last year, said the State Bank of Pakistan (SBP) on Wednesday.

In percentage terms, the CAD narrowed to 1.5pc of GDP during the July-Feb period compared to 5pc in the same period last year mainly on the back of 26.06pc reduction in the trade balance.

The Pakistan Bureau of Statistics (PBS) trade data showed the country’s imports during the period under review declined by a massive 13.81pc. However, the export sector failed to impress despite almost 50pc fall in the rupee’s value in the last 24 months.

Exports inched up 3.62pc to $15.643bn during the July-February period compared to $15.097bn in the corresponding period last year. Exports are likely to remain stagnant in the remaining months as the global virus-related shutdowns have already slowed down industrial production especially in export-oriented sectors.

On a month-on-month basis, the CAD shrank by 60pc to $210 million compared to $534m in January.

The government had, at the beginning of the current fiscal year, introduced a range of measures including market-based exchange rate, interventions in the form of curbs on unnecessary imports and extension of significant incentives to the export-oriented sectors.

The government has also slowed down the machinery and construction-related imports from China following the completion of China-Pakistan Economic Corridor Phase I.

In addition, the deficit is likely to shrink further in the remaining months of current fiscal year following the significant reduction in the global crude prices. Crude prices have fallen to their 18-year lows as inventories have built up in the wake of global shut down prompted by the spread of coronavirus.

Petroleum imports account for more than one-fourth of the country’s total imports bill. The WTI crude prices have fallen from $61.49 per barrel in December 2019 to current $24.19.

SBP Governor Dr Reza Baqir while announcing the monetary policy on Tuesday remarked that “the plummeting global oil prices will improve the current account.”

The SBP in the monetary policy announcement also noted that “the impact on the current account was expected to be mildly positive as the savings from low oil prices were expected to offset potential weaknesses in net exports and remittances.”

Published in Dawn, March 19th, 2020

 

[shah_123]

CAD shrinks and rupee depreciates --- if this imf man Reza Baqir could explain us this connection.

 

[Enigma SIG]

CAD shrinks and rupee depreciates --- if this imf man Reza Baqir could explain us this connection.

In what world would a shrinking CAD be linked to currency valuation?

 

[ejaz007]

Reduction in imports also means your local industry is declining.

Local manufacturing is declining therefore they are not importing spare parts and machinery required for manufacturing.

E&P sector is becoming dormant therefore they are also not importing spare parts and machinery.

It is not necessarily a good news since government earns a lot of revenue which shall be lost.

Then the tax shall be levied on salaried persons and fuel prices shall not be reduced to earn money.

Prices of electricity and gas shall be increased to increase the revenue.

 

[HammerHead081]

Our industry is being destroyed by decreasing imports!

 

[ejaz007]

Beyond current account
By BR Research on March 20, 2020

The current account deficit went down 71 percent year-on-year to $2.9 billion (1.5% of GDP) in Jul-Feb. In February alone, the number is down to $210 million, as compared to $534 million in January. Imports are down by 18 percent or $6.3 billion in Jul-Feb. Exports are up by 3 percent, and remittances by 5 percent. The major savings are from imports. It is hard to predict the trajectory of current account in days of a pandemic. Everything is down; being a net importer, CAD in all likelihood will fall further.

The overall trade of goods and services will slowdown. That is not good for any economy. There will be job losses and businesses' cash flows will come under stress. There will be an overall dent on both volume and value of trade – be it imports or exports. A few are exaggerating the import savings by doing back of the envelope calculations on low oil prices; but before the benefits accrue, the worse for virtually every business is in offing.

Having said, the impact of volumes on exports could be higher than imports. Imports are mainly of essentials be it energy, food or raw materials in manufacturing. The luxury imports are already at multiyear low. There will be savings in value across the board as all the commodity prices have nosedived. There might be some disruption in raw materials to affect manufacturing value chains. But demand destruction may not let the inventories replenish.

The economic slowdown will have lesser demand of a few imported goods. There will be less travelling; so low demand of oil import. In March, petroleum consumption will be low. All the value chain of oil is making losses. Public gathering restriction will lower palm oil and other food demand. There will be less demand for many other domestically produced goods. Time is not far before construction activities are halted and that will lower iron and steel imports.

On exports, March orders are effected for a few, but April onwards orders are cancelling and no new orders are coming anymore. In terms of reporting, export number were low in Jan (PBS) due to transporter strike which has a positive spillover in Feb. The hike will translate in SBP numbers in March, which could be a better month. But thereafter, it looks downhill.

Pakistan's 60 percent exports are textile. The market is mainly US and Europe for finished products and Far East and Bangladesh for selling yarn and fabric. In Feb, there was less demand from China and Far East as those were in quarantine. Now, there is some pickup in demand from these, as China has started opening up after the outbreak is (at the time) is fast decelerating.

But the finished good (value added export) is getting hit. The direct buyers like Nike and others are even cancelling prepared orders to be shipped in March. Others are cancelling export orders where the product is yet to be made. Not to mention, no new orders are coming. In January, the industry was running at full capacity and now a few factories are being partially closed. Hotels are top client of towels and bed sheets and the industry is worst affected. The number of closures will increase.

Apart from export dollars, jobs will be lost too. The story of sports, leather and auto parts would be no different. There is some surge in products like surgical goods and textile for hospital use. But in a nutshell, the number would be low. The cotton price is falling and that will lower the value of textile exports. One can safely say that the demand will be ow in Apr-Jun.

Remittances may not be affected immediately; but if the oil prices remain low for next few months (chances are high), there will be some dent in it. More than half of inward remittances come from oil rich GCC.

The current account savings would be there, but the impact on economy might not necessarily be net positive. The other problem is in financing of current account deficit. The reliance has lately remained on portfolio flows in debt market. $1.3 billion out of $3.2 billion of hot money has already evaporated in March. Let's see how much current account savings would be there to keep balance of payment in control.

https://www.brecorder.com/2020/03/20/581809/beyond-current-account/