Macro Analysis /
Pakistan

Pakistan Economy - May 2022 Balance of Payment update

  • Pakistan’s CAD print for May has more than doubled to US$1.4bn after trade deficit expanded on declining exports.

  • Remittances took significant hit and declined 25% mom to US$2.3bn in May from all-time high remittance of US$3.1bn.

  • SBP Reserves have nearly halved since December 2021 and provide an import cover 1.5 months to US$9.7

Intermarket Securities
29 June 2022

High CAD on low exports and remittances; FY22f to close at US$16.5bn

Pakistan’s CAD print for May has more than doubled to US$1.4bn after trade deficit expanded on declining exports owing to global demand slowdown in food and textile. Remittances also fell short to cushion the trade gap after declining to a 14-month low of US$2.3bn owing to easing of travel restrictions, coming off from a high base in the prior month. Pakistan is likely to end FY22f with a CAD of US$16.5bn (4.4% of GDP) while FY23f estimate stands at US$12.6bn (3.0% of GDP), moving into a relatively normal range owing to absence of imports relevant to TERF and COVID-19 vaccinations.

Key takeaways:

  • Trade deficit stood at c.US$3.1bn in May, slightly lower than last six months monthly average of US$3.2bn. Exports clocked in at US$2.5bn, down 21% mom, majorly owing to textile, contributing 60% to total exports, where supply was affected by reduced working days amid Eid holidays and gas curtailment issues. Overall, imports are down only 6% mom to US$5.7bn. The major decline was witnessed from Petroleum and Machinery imports, which reduced by 21% and 7% versus April, respectively. However, PBS data shows that oil imports increased 19% mom to highest ever US$2.6bn against SBP’s print of US$0.9bn. This shows that the disparity between PBS-SBP data has widened again and a one-off anomaly may likely be seen in the near-term.

  • We believe, Pakistan's monthly imports are likely to stay lower than US$6.0bn average monthly imports (FY22TD) owing to low machinery and vaccination imports. Simultaneously, oil demand may likely start sobering as domestic retail fuel prices have skyrocketed and petrol demand in Pakistan bears negative price elasticity. However, FO imports owing to low gas imports/availability may likely keep imports upbeat for a few months. We believe, some saving grace will also emerge from palm oil imports as international prices have come off by 41%.

  • Remittances during the month took significant hit and declined 25% mom to US$2.3bn from all-time high remittance of US$3.1bn. Cumulatively, remittances have risen 5% yoy to US$28.1bn in 11MFY22. Going forward, remittance growth may likely remain flat in FY23f despite normalization of air travel which may reinstate the underground banking channels.

Post China deposit, IMF programme will provide some relief

SBP Reserves have nearly halved since December 2021 and provide an import cover 1.5 months, which puts Pakistan in a tough spot in making budgetary policies during consultations with the IMF. A few prior actions are still needed for the IMF Staff level review completion which will pave way for two tranches under 7th and 8th review, thereby realizing US$1.9bn besides the Chinese loan rollover of US$2.3bn. During May, overall Balance of Payments showed nearly US$823mn in amortization while another US$733mn repayment was done during the week ended June 17, 2022. This repayment will likely be reflected in the BoP print for the ongoing month. We believe, some respite has emerged in the FX markets, albeit temporary, may unlikely sustain as net short-term FCY drains stand at US$20.85bn as at April 2022.