The analysts see the country’s trade imbalance taking a breather during the month of February (2012) as Pakistan Bureau of Statistics (PBS) data shows the gap declining by 15.8 percent month-on-month (MoM).
“This was reinforced by four percent MoM increase in exports and five percent decline in import balances,” said Farhan Bashir Khan of InvestCap.
During 7MFY12, country’s oil bill surged by 35 percent YoY, while its contribution in total imports remained bounded to 35 percent compared to 31 percent same period last year.
Although the oil prices rallied during the month of Feb-12 (+5 percent MoM), the impact on import bill as per PBS figures appear muted.
“Nevertheless, we expect impact of higher oil prices to be reflected in coming months,” said Khan.
On the other hand, the analyst said, with bumper wheat crop expected this season, estimated wheat export of two million tons could yield additional $ 500 million for the country’s exports during FY12.
While it remains to be seen how trade performance would eventually be reflected in country’s balance of payment during Feb-12, the current account deficit is expected to land in the vicinity of $ 200 million, accounting for 1.3 percent of GDP, for the month, further supported by improved remittances that increased by 4 percent MoM).
In this manner, we expect cumulative current account deficit to reach $ 2.8 billion during 8MFY12, two percent of GDP on annualized basis.
“We further expect full year deficit to stay in the same range relative to GDP,” Khan said.
So far, the central bank has managed to keep exchange rate from slipping further (0.8 percent depreciation against USD CY12TD, compared to 5 percent Jul-Dec11) while also keeping the currency market stable (PKR/USD movements 42 percent less volatile during CY12TD compared to 1HFY12).
“However, the same comes at a price,” he said.
Average injection under OMOs has crossed Rs 300 billion in recent sessions indicating the drying domestic liquidity at the cost of intervention at the currency counter.
Although such injections might be necessary to keep markets liquid, it remains to be seen how any excess liquidity would be reflected in the system (depending upon the quantum of mop-ups) once foreign exchange reserve dwindle to a point where a free floating regime becomes inevitable.
As per latest figures, reserves with SBP have fallen below $ 12 billion, down 15 percent since Jun-11, although banks are seemingly more liquid with $ 4.4 billion, up 29 percent since Jun-11.
“We deem it is only a matter of time before liquidity at foreign counter dries up (current and more recently even financial accounts have been running in deficits) and eventually see more serious consequences, specifically on inflation during FY13,” said the analyst.
As far as currency is concerned, we see recent spell of stability would eventually fade away, assuming no significant change in the flow of foreign funds.
