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News Admin
 
Date
 20/03/2020
News Provider
 Nur Aisha Abd. Wahab
News Source
 Business Recorder
Headline
 Beyond current account

Business Recorder (20/03/2020) - 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.


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



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