Macro Analysis /
Global

Pakistan Economy - Oct’22 CAD widens amid lower remittances and exports

  • Pakistan’s monthly CAD has increased to USD567mn in Oct’22, up 56% MoM primarily due to decline in remittances & imports

  • During Oct’22, the trade deficit declined a mere 3% MoM to USD2.3bn

  • Remittances declined in Oct’22, to USD2.2bn (-9% MoM). Lower inflows from KSA, UAE and UK have reduced the overall base.

Intermarket Securities
21 November 2022

Pakistan’s monthly CAD has increased to USD567mn in Oct’22, up 56% MoM primarily due to decline in remittances and imports. However, CAD has reduced significantly on YoY basis from USD1.78bn in Oct’21. This is due to administrative measures to curb non-essential imports and reduced energy imports, lowering the trade deficit to USD2.3bn (-35% YoY and -3% MoM). Remittances again witnessed a downward trend during the month to c.USD2.2bn (-9% MoM). The Balance of Payment position turned positive (USD1.2bn) as Pakistan received USD1.5bn loan from ADB in the last week of October. Going forward, possible loans and international aid for floods rehabilitation, coupled with manageable CAD will likely provide external support to BoP position apart from USD1.0bn international sukuk payment which is scheduled in the first week of December.

Imports restrictions shrunk trade deficit despite reduced exports

During Oct’22, the trade deficit declined a mere 3% MoM to USD2.3bn, largely owing to administrative measures taken to restrict import of non-essential items alongside 24%MoM decline in petroleum imports to c.USD1.2bn. However, exports have also reduced by 7% MoM to USD2.3bn. This is due to lower textile exports and PKR volatility, which likely refrain exporters from remitting proceeds to Pakistan.

Remittances slide again amid PKR volatility and informal channels 

Remittances declined in Oct’22, to USD2.2bn (-9% MoM). Lower inflows from KSA, UAE and UK have reduced the overall base. The spread between actual and offered exchange rate coupled with active participation from informal channels dented remittance flows during the month. Looking ahead, less PKR volatility and increase in Pakistani worker registration in GCC countries may increase remittance flows in the remainder of FY23. As per Board of Emigration and Overseas Employment (BEOE), around 693k Pakistanis have expatriated during 10MCY22TD compared to 288k and 225k during CY21 and CY20, respectively. Most of these expatriations have occurred from Middle East countries which continue to enjoy better macros in a high oil price environment.

BoP challenge persist; assistance is much needed

The overall Balance of Payment (BoP) turned positive in Oct’22 and stood at USD1.2bn against negative USD662mn last month. During Oct’22, Pakistan received USD1.5bn loan from ADB. Post these inflows Pakistan paid c.USD1.0bn external debt repayment in the start of Nov’22 while another international sukuk payment of PKR1.0bn is due in Dec’22. Therefore, to support overall BoP and Fx reserves, Pakistan is in dire need of support from international organizations and friendly countries.

Apart from this, recent floods damaged extensive parts of Sindh and Balochistan and displaced c.15% of Pakistan population and c.2.3mn homes have been affected. As per initial estimates of several agencies, total damages have so far reached USD30-40bn and this will likely slowdown GDP growth to 2% as per recent estimates provided by World Bank. Pakistan is expected to receive additional assistance from international organizations and countries. We expect the pre-flood estimate of SBPs Fx reserves of USD15bn by end-FY23 to remain broadly intact.