The writer is a member of staff.
The writer is a member of staff.

A FULLER picture of where exactly the economy is headed is now appearing as the central bank appears to be released from the political constraints it was under in the period before the arrival of an interim government, and facts on the ground drive a necessary adjustment that can no longer be explained away.

Here are some key facts to keep an eye on: the current account deficit came in at $16 billion for the first 11 months of the fiscal year. This means the economy is burning something like $1.45bn of foreign exchange reserves every month. This is how the State Bank put it in its last quarterly report: “A significant increase in portfolio inflows and a marginal growth in net FDI — amid lower net loan disbursements — were insufficient to fill the widening gap in the current account. As some of the import payments were made from interbank market, this drained FX liquidity from the interbank market. At the same time, with the expectation of PKR depreciation consolidating throughout the year, FE-25 deposits with banks continued to rise. Resultantly, the kerb rate increased swiftly from October 2017 onwards, ahead of the PKR depreciation in December 2017 and March 2018.”

Translation: money is coming in, but it’s going out faster still and people are panicking, buying dollars because they are scared of an impending devaluation.

How sustainable is the brief moment of respite that appeared to be opening up before us?

Notice from October of 2017 onwards, the central bank says panic-buying of dollars began. “Managing FX liquidity in such circumstances proved to be quite challenging for the central bank,” the report continues. Translation: we don’t know what to do, money’s running out and people are going nuts.

Net result: “[b]y end-March, official reserves had declined by US$4.5bn and reached US$11.6bn,” the report continues (they have fallen to $9.5bn as of July 6, the latest period for which data is available). At $11.6bn, the amount was enough to cover two months of merchandise imports, so clearly that import cover has fallen below two months now.

In two places, the same report mentions something slightly odd: “SBP data suggests that payments for machinery items imported earlier for CPEC projects are now being made from the interbank market.” It’s not clear to me why this needs special mention, but something is up. If payments are being made for “machinery items imported earlier”, then why does the SBP only have a suggestion to the effect? Shouldn’t import payments be clearly visible like they are every else? Are payments for CPEC-related machinery imports being made under some special arrangement whereby the transaction is not visible to the SBP, leaving behind a trail that only ‘suggests’ that payments are being made from the interbank market? A fuller explanation of this somewhat cryptic line would be appreciated.

Machinery imports have been the bugbear of the external sector of the economy for a number of years now. Their stupendous rise over a three-year period was addressed by the PML-N government by referring to them as ‘healthy imports’, arguing that they will soon subside, and that they are an investment in our future growth. Once the machinery is installed and running, the productivity increases they will bring about will help bring the external account back into balance.

So as of a few months ago, machinery imports did indeed begin to decline as many of the CPEC early-harvest projects near completion. But payments are still being made on much of the machinery that has already been imported, averaging $702 million per month throughout the fiscal year. “The timing of these higher payments is not ideal as they have coincided with increasing global crude prices,” says the report.

Exports have shown a bit of a rebound since January, and hopes were fanned in the departing days of the PML-N government that the deterioration in the external sector may have turned a corner. Could it be that imports will now subside as the pipeline is cleared of machinery-related payments, while exports continue growing due to the depreciations in the exchange rate and the various incentives offered by the government?

The report seems to cast some doubt on this. For one, much of the increase in exports came from the food group, meaning rice and wheat, due to a good crop and exportable surplus available in both categories. This year the water shortages have likely hit both crops, and whether or not exports in food can keep growing at the same pace is doubtful.

Second, textile exports also saw a rebound with an incremental change of $712.5m. But the majority of this increase ($451m) came from two categories: knitwear and readymade garments. Demand for these tends to fluctuate, and given how the international trade order is coming under increasing strain, there are reasons to be careful in forecasting the same growth for next year.

Meanwhile, oil imports galloped along despite an actual decline in the quantity of oil imports. So the quantity imported dropped by 9.8 per cent due to a sharp reduction in furnace oil imports as these were replaced with LNG imports. But the oil import bill (including LNG) shot up by 31.8pc to hit $10.2bn. The largest reason for this was what the report calls “the price effect”, meaning prices of oil and LNG in global markets were on the rise throughout the fiscal year.

For the next year, the fuel import bill is likely to post yet another jump as more power generation gets going on LNG (whose prices are also forecast to rise in the years to come), and automobile sales remain brisk.

So how sustainable is the brief moment of respite that began to appear before us in the opening few months of 2018, say from January onwards? The answer is: not very. Import payments may subside in one category, but will rise in another. The rebound in exports is also narrowly based, and likely to be impacted by weather conditions this year. In short, the external sector is likely to remain under stress.

The writer is a member of staff.

khurram.husain@gmail.com

Twitter: @khurramhusain

Published in Dawn, July 19th, 2018

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