Macro Analysis /
Pakistan

Pakistan Economy: FY22 CAD clocks in at a 4-year high; mild respite ahead

  • Pakistan Jun'22 CAD swelled to USD2.3bn as imports hit record USD7.04bn from high energy requirements

  • A 4-year high annual CAD of USD17.4bn (4.6% of GDP) is likely to decline to USD12.6bn (3.0% of GDP) in FY23

  • Pakistan will likely face difficulties in overcoming Fx liquidity constraints, specifically via bond issuances

Intermarket Securities
28 July 2022

Current account deficit (CAD) for Jun’22 swelled 59% MoM to USD2.3bn as imports hit a record high of USD7.04bn from oil demand, notwithstanding second highest monthly exports and seasonal rise in remittances from Eid. With this monthly print, Pakistan ended FY22 with a 4-year high CAD of USD17.4bn (4.6% of GDP) against USD2.82bn (0.8% of GDP) last year. In the absence of adequate foreign exchange liquidity, the disruption in goods imports along with administrative ban on non-essential items will trim CAD to a sizeable extent in the coming months. However, we currently stick to our base case estimate of USD12.6bn (3.0% of GDP) for FY23, where most contraction in import bill will be led by absence of TERF-related machinery and COVID-19 vaccinations in addition to the respite from palm oil imports.

  • Trade deficit hit an all-time high of c.US$3.9bn in Jun’22 owing to record imports of USD7.04bn, despite second highest monthly exports of USD3.1bn, up 26% MoM. Pakistan’s energy requirements surged tremendously during Jun’22, where the country’s monthly oil import bill hit the highest mark of USD2.9bn at an effective cost of USD116/bbl.

  • Going forward, imports are likely to stay lower than FY22 monthly average of USD6.0bn owing to low machinery and vaccination imports, coupled with relatively lower international oil prices and crack spreads. Some savings will also likely emerge from Foods imports as international palm oil prices have come off by c.50% recently. All this is in addition to bottlenecks created by inadequacy of foreign exchange liquidity and administrative measures to curb non-essential imports. On the other hand, Textile exports have remained high owing to summer demand and adequate energy availability, but home textile demand growth may unlikely stay put in FY23.

  • Remittances during Jun’22 increased 18% to US$2.8bn on account of seasonal rise from Eid-festivity-flows, managing to remain above FY22 monthly mean of US$2.6bn. Cumulatively, remittances have risen 6% YoY to US$31.2bn in FY22. We believe, remittance growth is likely to remain tepid as the normalized travel, opening up avenues of underground banking channels.

IMF tranche needed to rescue Pakistan

Despite the USD2.3bn rollover from China in Jun’22, SBP Reserves have increased by a meagre USD420mn Jun’22 amid elevated imports keeping import cover around 1.5 months. However, IMF staff level agreement is through and the USD1.2bn tranche is subject to Board approval, which is likely by end-Aug’22. This will potentially arrest free-fall in USD:PKR parity, which has lost 19% since the start of Jun’22. We believe, Pakistan’s attempts towards overcoming the foreign exchange liquidity constraints will be difficult, more specifically in terms of bond issuances in the current scheme of things. This has potentially garnered an approval for executing an express transaction to sell government stake in State-Owned Entities.