Business Recorder (BR) Research
The benefit of lowest oil prices in January has accrued with a lag in February numbers as current account posted a surplus of $157 million in Feb as compared to a deficit of $590 million in Jan. In Jul-Feb the CAD registered a decline of 5 percent to $1.86 billion (0.9% of GDP) versus $1.95 billion (1.1% of GDP) in the corresponding period last year.
Goods exports are up by 10 percent in Feb to reach $1.9 billion while in eight months exports are down by 10 percent. The textile exports are down by 5 percent in Jul-Feb to $8.5 billion with cotton yarn taking the major hit (down by 21%). The problem is more in other exporting sectors as exports barring textile are down by 16 percent in Jul-Feb with food group and other manufacturing groups both are down by 15 percent each.
In terms of GDP, currently, exports are at the lowest ebb. Exports to GDP for the first time in decades is single digits as it was recorded at 8.8 percent of GDP in FY15 as compared to previous ten years average of 11.2 percent and twenty years average of 12.1 percent. And the ratio is falling further in FY16.
In case of imports, February was a good month as probably the benefit of depressed oil prices maximized as, since January end, oil prices are trying to head north. The way oil producers around the globe are shedding their ego and putting aside their respective political agendas to give some respite to low oil prices, time is not far when oil prices will be north of $50 per barrel.
The oil import bill in February was down by 6 percent or $257 million to stand at $2.99 billion. In 8MFY16 the import bill is down by 6 percent to $26.3 billion. Low petroleum import is the chief reason for tamed imports bill. In 7MFY15 (since Feb data for imports is not updated by SBP till the time of writing), the petroleum import bill is down by 40 percent to $5.0 billion. Barring oil, 7MFY15 import bill was up by 9 percent primarily due to a surge in machinery imports which jumped by 14 percent to $3.6 billion.
The PBS data for seven months which is based on actual imports reveals an interesting statistic – the machinery imports bill surpassed the oil imports in dollar terms (machinery imports at $4.81 bn versus petroleum group at $4.66bn). That is a rare sight and the way expansion in energy and transport infrastructure, and in various other industries is planned, machinery imports may jump further. In FY15 machinery imports were 2.8 percent of GDP and it may cross 3 percent of GDP in FY16.
Machinery imports averaged 4.3 percent of GDP during FY05-08 when the economy was going through an expansionary cycle but that was not able to generate any kind of export surplus as exports to GDP ratio averaged 10.5 percent during FY09-15 as compared to 12.3 percent in FY01-08.
The SBP is probably fearing that industrial and infrastructure expansion planned in energy, transport, construction and other industries may be there for domestic consumers with no meaningful contribution to exports. And to counter that, the central bank in an absurd way is discouraging willing domestic commercial banks to finance projects in power and other sectors envisaged by the private sector. Even the SBP is not letting textile giants get domestic financing for their BMR activities.
The argument by the central bank is that private sector should get foreign funding for imports of plants and machinery so that it does not adversely affect foreign exchange market in short run. That is not the right way to counter any possible balance of payment crisis as the sovereign risk of Pakistan is too high (last Euro Bond of ten years at 8.5% fixed rate) and none of the private sectors are getting financing below LIBOR plus 6 percent. Also, NEPRA is not allowing tariff based on financing above LIBOR plus 4.5 percent.
Even the NEPRA revised the tariff financing slabs; it does not make economic sense to go for such expensive foreign financing for projects catering domestic needs. When the LIBOR rates will normalize from current low of 0.5 percent to 4-5 percent with high oil prices, the strain on the balance of payment would be much higher than what it would be today from higher machinery imports financed by domestic sources.
The infrastructure and industrial expansion are imperative for sustained economic growth and job creation for growing middle class. The policymakers cannot simply be blindfolded to the fact and they should not be too myopic in approach to seize to see beyond 2018 elections.
Nonetheless, the trade deficit is reduced by 28 percent in Feb to stand at $1.12 billion and in Jul-Feb trade deficit registered at $11.9 billion with virtually no change on year on year basis. The gap is almost single-handedly financed by home remittances which are recorded at $1.5 billion in Feb and 12.7 billion in 8MFY16, up by 6 percent YoY. Home remittances which averaged 3.3 percent of GDP in FY00-08 have increased to an average of 5.3 percent in FY08-14 and peaked at 6.8 percent of GDP in FY15.
FY15 is likely to be the top of the curve as the growth in remittances cooled down this year so far. The juice of PRI initiative is probably exhausted and changing economic dynamics of Middle East may be also adversely affected the growth of remittances. Since most of the inward money is from low-skilled labor class working in the Middle East, the need is to work on exporting skilled labor to the Gulf and other regions as well.
The focus of western donors and Punjab government is on enhancing the skill set through vocational training in coming five years. Let’s see how effective the programme will be, in order to continue the growth in home remittances.
First published: March 24, 2016.
