Balance of Payments – 2M FY18 CAD at US$ 2.6bn
As per latest data released, current account deficit clocked in at US$550mn in Aug’17 (Jul’17-Revised: S$2,051mn). For 2MFY18, the current account deficit level stood at US$2,601mn (up 102% YoY).Trade deficit for goods witnessed notable improvement in Aug’17, closing in at US$2,158mn, recording a contraction of 25% MoM. The improvement came on the back of recovery in exports (up 15% MoM), coupled with declining imports (down 10% MoM). Support to the current account was also lent by the increase in workers’ remittances that surged to US$1.95bn in Aug’17 (up 27% MoM), higher compared to FY17 monthly average of $1.6bn. However, the growth in remittances is mainly attributable to the seasonal Eid effect. Resultantly, on the basis of 2MFY18, remittances are higher by 13% over last year. While the Financial Account worsened by 9% YoY in 2MFY18, the flows in the account remained higher in Aug’17, registering a healthy 22% MoM growth to stand at US$567mn. In Aug’17, the overall balance of payment turned positive with an inflow of US$ 147mn, in stark contrast to a net outflow US$ 1.53bn in the preceding month.
Despite improvement in current account witnessed in Aug’17, the overall BoP has remained under pressure during the last few months amid sizeable current account deficit although financial account flows remained relatively better.
After dropping to below US$20 bn threshold, the country’s FX reserves improved marginally to around US$ 20.05bn by 22nd Sep 2017, whereby the net reserves with commercial banks rose to an all-time high of US$ 5.9bn. As indicated earlier, the MoF is now finally looking to select lead arranger for international Sukuk which could be over US$ 1bn size. Despite volatile external account position, PKR-USD exchange rate is expected to be maintained around current levels in the near term. While the current account is on the rise on the back of burgeoning trade deficit, the increase in machinery imports should bode well for the economy in the long-term as industrial activity and exports would eventually pick up. We believe that financing of higher current account would continue to be through additional loans by donors agencies as well as China, resultant impact of higher capex on future growth and exports should be considered as the silver lining in the medium to long term.
Large scale manufacturing sector posted a record high growth rate of ~13% year-on-year in Jul’17, which is nearly four times the average monthly growth rate witnessed in the last six years. Although a one-off and likely to slow down to more normalized level, this is still an encouraging economic sign as one of the major drivers of pickup in LSM activity has been the increase in manufacturing of iron and steel products that is being used in the ongoing construction and infrastructure development projects. This would eventually help increase the country’s economic output in the medium to long term. The LSM growth is expected to stay strong going forward as construction and other infrastructure activities pick up in the months leading to elections. Decade low interest rates coupled with soft
inflation will continue to boost local demand, as evident in the strong trend in private credit offtake witnessed in recent months
Inflation & Interest Rate Outlook
Consumer Price Index (CPI) for Aug’17 went up by 0.2% MoM ~ translating into a YoY level of 3.41%, in line with our expectations of around 3.5-3.6%. The average 2MFY18 CPI stood at 3.16% compared to 3.84% in 2MFY17. Core inflation on the other hand has remained at elevated levels, stood at 5.5% in Aug’17. Going forward, CPI inflation is expected to remain within the comfortable range of around 3.5%-4% over the next few months. With comfortable inflation trajectory despite weaker current account position, we continue to maintain our status quo stance on the interest rates at least for the remainder of CY17. As per the released minutes of July MPS, status quo decision was taken with a majority 8:1 with one member supporting 25bps rate cut.
Muhammad Faran is an economist associated with IPI.