Macro Analysis /

Pakistan: Reasonable CAD despite oil payments; energy conservation is imperative

  • Current account deficit halved to USD1.2bn in July despite hefty oil payments, as PKR deval moderated imports

  • Remittances have shown steady movement barring Eid related seasonal flows from previous month

  • Adherence to the re-tracked Fund programme is imperative alongside administrative energy conservation

Intermarket Securities
24 August 2022

Pakistan’s monthly CAD nearly halved in Jul’22 to USD 1.2bn (3.7% of GDP), despite hefty oil payments as the free-fall in Pak Rupee (-17%) continued to act as a key shock absorber, supported by administrative measures that reduced trade deficit to USD3bn (-21% MoM). Notwithstanding the fizzling out of Eid festivity impact, rate of remittance flows has remained steady at USD2.5bn for Jul’22. Trend reversal in PBS-SBP import differential was witnessed owing to oil payments where most shipments, at high crack spreads and as under PBS data, were made during Jul’22. Adherence to the renewed IMF program is imperative besides administrative measures to conserve energy in order to keep CAD within the targeted level of USD10bn (3.0% of GDP).

Respite in trade deficit

Trade deficit has come off from its fresh peak of USD3.9bn to USD3.1bn, largely owing to demand moderation as well as administrative measures on restricting non-essential items, more specifically the CKD imports. The biggest decline was seen in machinery and transport group. Infrequent trend reversal in the PBS-SBP import difference was also witnessed during the month. Which was primarily on account of higher crack spreads booked in prior month and cash transactions being settled in Jul’22. This also kept Pakistan’s average cost of oil import higher than oil prices.

Remittances continue to cushion trade 

Remittances have stayed put during the month. While Eid festivity impact was restricted to Jun’22, the latest month flows of USD2.5bn depict a higher rate of remittance of USD209/NRP.  Even though remittances are down 9% MoM, we expect growth during the year to remain tepid backed by increase in Pakistani worker registration in GCC countries. As per Board of Emigration and Overseas Employment (BEOE), around 458k Pakistanis have expatriated during 7MFY22TD as against 288k and 225k during FY21 and FY20, respectively. Most of the expatriations have occurred towards Middle East countries which continue to enjoy better macros in a high oil price environment.

BoP stood negative; congruence to Fund is needed

Notwithstanding a better CAD in Jul’22, the overall Balance of Payment (BoP) position stood at a negative USD1.8bn. This is largely owing to the absence of financial flows from any country during the month. During Jun’22, Pakistan received USD2.3bn deposit from China while in Jul’22 external debt repayments of USD748mn continued to keep financial account negative.

Pakistan is poised to receive USD4bn under friendly assistance from GCC countries, which will effectively put its external account at an over-financed status. SBP has already indicated a pause in tightening with a few downside risks from exogenous factors and deviation from the path of fiscal consolidation.  While the end of overheating of economy is in sight (Jun’23), Pakistan needs stay adequately congruent to the Fund’s stipulations and implement energy conservation drives to reduce oil import bill.