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Karachi: External Account remains the ‘The Achilles heel’ of the economy
SBP 1HFY12 report
Major improvement seen in the 1HFY12, SBP reports
The recently published 1HFY12 report by the State Bank of Pakistan (SBP) “The State of Pakistan’s Economy” highlights some of the major improvements which took place during the period. This includes low inflation, modest increase in money supply (M2), higher tax revenue collection, low fiscal deficit and higher remittances. On the growth side the commodity producing sector has performed relatively better than expected owing to robust agricultural output in major crops.
But, aggregate demand remains stagnant, due to low investments
The overall investments activity failed to pick-up despite the reduction in cost of borrowing by SBP, (12% discount rate). The lack of demand for fixed investment primarily owes to energy shortages, law and order situation and availability of excess industrial capacity. However the problem of investment may further pace-up if the government borrowing remains unabated, which will induce inflation, further crowd-out the private sector and increase public sector debt.
External Account remains the ‘The Achilles heel’ of the economy
Nevertheless, the report highlights the risks to macroeconomic stability have indeed increased and if something is to blame it would be the external sector. The fall in financial and capital inflows, and the pace of declining export figures. The overall impact of the deteriorating external account has not only exerted considerable pressure on the exchange rate and has subsequently resulted in FX reserve depletion, but has also created a “Liquidity Vacuum” in the overall economy.
Projections of Major Economic Indicators
| FY11 | FY12 | ||
| Actual | Annual Plan Targets | SBP Projections | |
| GDP | 2.4% | 4.2% | 3.0-4.0% |
| CPI Inflation | 13.7% | 12.0% | 11.0-12.0% |
| Monetary Assets | 15.9% | 12.0-13.0% | |
| USD billion | |||
| Workers’ Remittances | 11.2 | 12 | 12.0-13.0% |
| Exports | 25.4 | 25.8 | 24.1-24.6% |
| Imports | 35.8 | 38 | 40.3-41.0% |
| Percent of GDP | |||
| Fiscal Deficit | 6.6% | 4.7% | 5.5-6.5% |
| Current Account Deficit | -0.1% | 0.6% | 1.5-2.5% |
| Source: SBP |
Balance of Payment
8MFY12, current account deficit swells to USD 2.65bn
Country’s current account deficit for the period 8MFY12 stretches to USD 2.65bn compared to USD 194mn in the corresponding period last year same period. This was led by a USD 10.52bn trade deficit against USD 7.35bn and USD 12.44bn service and good deficit, compared to USD 8.12bn last year same period. However country’s remittances continue to post a positive outlook reaching well above USD 8bn mark up by almost 23%YoY. Considering the current Arif Habib Limited estimates with three months trailing sum the deficit will likely reach USD ~4bn, close to Arif Habib Limited’s initial estimates of USD 3.7bn.
Lower export base and high import base, trade deficit reaches USD 10.5bn
8MFY12 exports grew by a meagre 5%YoY (USD +16.25bn) while for the month of Feb-12 alone the exports were down by -5%YoY (USD 2.15bn). In comparison to this the imports continued to pace up reaching USD ~26.77bn (+18%YoY) during the period, where for the month of Feb-12 the imports registered a 16% YoY growth (USD +3.56bn). Possible reasoning for higher import seems to stem from growing oil-based product weightage almost 37% and rising oil prices up by ~17% CY12TD to USD 124/bbl (Arab Light, Gulf). As a consequence the overall trade deficit stretched to USD ~10.52bn (+43%YoY).
Portfolio investment starts to regain momentum, up by +114% YoY in Feb-12
The financial account balance remained stressed owing to falling foreign inflows. The Foreign Direct Investments (FDI) which posted a YoY decline of ~45% or down to USD +571mn compared to USD 1.04bn same period last year. Similarly the portfolio investments recorded an outflow of USD ~131mn compared to an inflow of USD 242mn (8MFY11), primarily due to USD 128mn outflow in equity based investments and USD 3mn in debt based. However due to improved equity market liquidity and better returns offered, the overall portfolio investment position in equity improved to USD 20mn (+186%YoY) in Feb-12.
National Saving Service
NSS alternative sourcing
In addition the government is likely to revise upwards, the National Saving Service (NSS) Certificates rate as per the mandatory quarter reviewing, ending Mar-12. Currently the rate being offered on certificates average around ~12.4%, with the recent 10YR- PIB yield almost touching 13.19% the NSS rate may scope a possible +75-80bps above the current rate in order to compete with other instruments. However, direct implication of such would like take some to effect but in short Arif Habib Limited might sees country’s saving ratio picking, which will reduce the investment gap created by lacking of external financing. This in Arif Habib Limited’s view would also temporary lift up liquidity constraints.
Long-term improvements likely to benefit external account position
In the medium to long term higher NSS, will eventually bring about if not significant but relative slowdown in broad money growth which as of latest has grown by +13.7% (as of 12-Mar-12). That in Arif Habib Limited’s view will help reduce excess demand, and simultaneously finance the burgeoning current account deficit.