Morning Call about Balance of payment

Karachi: : The country’s current account deficit for Jul’11 narrowed considerably by 88% to USD 75mn compared to USD 631mn same period last year.

According to Arif Habib Limited, this help pushed the overall country’s balance of payment to register a surplus of USD 78mn against a deficit of USD 334mn recorded in Jul’10, this is despite a weakening financial accounts position which posted a surplus of USD 142mn against USD 297mn in Jul’10. Strong growth in remittances alongwith robust export earning continues to remain underlying factors for current account deficit shrinkage. However in FY12 Arif Habib Limited expects there is less room for complacency. Amid at the recent global economic growth slowdown Arif Habib Limited may sees some of the sub heads of balance of payment coming under pressure. Hence any sharp deterioration in current account balance will be met through financial account, which given the current scenario will be less of a help.

Remittances and export growth continues to support CAB

With the start of FY12 the country’s current account provided much of a relief as the total deficit narrowed down to USD 75mn from USD 631mn last year same period showing a 88% improvement. This was supported by a 39% YoY (USD 1.1bn) growth in workers’ remittances and favourable export earnings of 28% YoY (USD 25.46bn). However the country’s trade balance still remains under the red zone, which continues to expands despite a stagnant growth of 8% YoY in imports (USD 3.15bn).

Falling in global appetite holds major implication in balance of payment

However going forward Arif Habib Limited thinks there is less room for complacency given the slowdown in global economic appetite. The trigger comes with the recent downgrade of US rating to AA+ by S&P and major EU countries rating being under consideration including UK, on the back debt driven crisis in the EU. The situation is further exaggerated given the recent rate hike in the India and China, due to high inflation projection. This will considerably weigh down on overall global economic recovery process to a mere halt. Therefore a key determinant to country’s external account outlook would be how favourable does the global economic events unfolds.

Exports likely to take a hit given the slowdown in demand

For instance the total exports are likely to come under pressure as global commodity prices eases (cotton prices as of Jul’11 stood at ~USd 149/lb against a high of USd 229.67/lb in Mar’11) while volumetric may also suffer due to overall weightage to US (~19% of the total exports) and EU countries (~12% of the total exports). Arif Habib Limited expects the exports to post a mere increase of ~4% YoY in FY12 to reach USD 26.5bn.

Slowdown would also trigger down to workers remittance falling short…

Similarly, although the chunk of workers’ remittances makes its way through GCC countries, but again US and EU countries combined makes upto ~27% of the country’s total remittances. Any slowdown in these countries will likely hurt the workers’ remittances inflow into the country in the long-run.

While descending oil prices will come as a major relief

However, on the flip strong economic fundamentals advocates towards the oil prices starting to descend (Arab light USD 105/bbl as of 18 Aug’11), which have remained elevated in much of the 2HFY11, USD 107.4/bbl on average against USD 79.1/bbl in 1HFY11, (+38%). This Arif Habib Limited believes would have major implications on the country’s imports as ~38% of the total Imports are related to petroleum related products. Arif Habib Limited estimates 3% fall in price of oil results in 1.8% cut down the total import bill per month, this may a major relief, given the bulging import bill which as of FY11 stands at USD ~36bn, 13% YoY rise.

Sluggish financial accounts pace, adds to the worry

The financial account balance remained shallow owing to falling foreign inflows. The Foreign Direct Investments (FDI) which posted a YoY decline of 17% (USD 91mn in Jul’11). In Pakistan the decline in foreign investments trend underlines factors faced primarily on the domestic and then external macro-economic front. For instance ~26% and ~12% (based on a 5-year average) of portfolio and foreign direct investment makes it way in to the country, through US and EU countries.

Pakistan’s Balance of Payment


Balance of Payment Jul-11 Jun-11 %MoM Jul-11 Jul-10 %YoY
Current Account Balance (631) 501  n.m (75) (631) -88%
Exports 1,657 2,665  -38% 2,122 1,657 28%
Imports 2,923 3,357 -13% 3,151 2,923 8%
Trade Deficit (1,266) (692) 83%  (1,029) (1,266) -19%
Remittances 791 1,105  -28% 1,096 791 39%
Capital Accounts   – 10  n.m  –  – n.m
Financial Accounts 297  512 -42% 142 297 -52%
Direct Invest. (FDI) 110  162 -32%  91  110 -17%
Port. Invest. (PI) (2) n.m  –  – n.m
Overall Balance (334)  1,140  -129% 78  (334) -123%
Source: State Bank of Pakistan, AHL Research




Hence based on aforementioned assumptions Arif Habib Limited foresees a current account deficit in FY12, therefore plugging in the deficit gap will be laid on financial account. However, Arif Habib Limited doubts that the financial inflows in FY12 would be enough to bridge the void left by current account deficit. Arif Habib Limited fears that financial inflows may not exceed USD 2bn, owing to global economic slowdown, political and economic turbulences. Monetization of funds under military aid (expected aid of USD 2.4bn per year); Coalition Support Fund (CSF) and most importantly through IMF SBA will render support to overall balance of payment.

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