Karachi, July 20, 2023 (PPI-OT): External sources to continue determining imports in FY24
After the year closed CAD at US$2.56bn in FY23, we estimate CAD at US$5.8bn for FY24E, where our estimates keep imports limited over potential scarcity of FCY in the ongoing year.
Our expectations are led by hefty debt obligations of US$22bn, while despite recent external commitments and IMF's fresh SBA, the country's prospective import cover only stands at ~8 weeks.
We believe adhoc measures on controlling FCY outflow may continue to some extent during the year. Any delay in fresh support to foreign exchange reserves increases probability of another round of sharp PKR depreciation against the US$.
FY24 CAD expected to trend with FCY availability
After the year closed CAD at US$2.56bn in FY23, we estimate CAD at US$5.8bn for FY24E, where our estimates keep imports limited over potential scarcity of FCY in the ongoing year. SBP estimates FY24 CAD close to US$4bn, while government estimates suggest CAD balance at US$5.8bn, albeit both projections incorporating normalization of imports, with conceivably higher export estimates. The same is also observed in IMF estimates, which are close to US$6.5bn for the year.
Key moving parts for FY24 CAD
Imports: Oil price movement would be crucial, as the segment contributes 30% to the import bill. Similarly, softening oil prices would reflect in contract-based RLNG supply to Pakistan as well, determining smooth energy supply from RNLG-based power plants. Our international oil price assumption for FY24 stands at US$80/bbl., where every US$5/bbl decline reduces our import bill estimates by US$950mn (annualized). During FY23, oil has closed at a lower level every quarter, remaining sticky around US$78/bbl of late.
Exports: On the Exports front, since Pakistan is highly dependent on textile exports (~60% of total), we do not see much support from exports on the external side. In addition to risk of interrupted energy supply to textile mills, global recession is likely to keep textile exports growth limited, and resultantly total exports growth muted.
Remittances: Uptick in remittances cannot be ruled out if gap between interbank and kerb rates do not widen from current levels. To recall, IMF has strongly emphasised on keeping a narrow gap between the two rates, where average premium between the interbank and open market rate should be no more than 1.25% during any consecutive 5 business day period. This is also among the country’s Structural Benchmarks under the new Stand-By Arrangement with the Fund. Moreover, ongoing growth in Non-Resident Pakistanis (NRPs) can also be an upside trigger to the remittances tally for FY24. To recall, despite continued growth in NRPs, remittances for FY23 closed 14% lower YoY at US$27bn (first YoY decline since FY17), taking remittances per NRP down 18% YoY - a 3-year low.
FY23 closes with limited C/A and BoP deficit
Current account balance reported a surplus for the fourth time in a row this month. The balance was reported at US$334mn for Jun-2023, further reducing FY23 CAD to US$2.56bn. Assessing the last 10, 20, 30 and 40 odd years, Pakistan’s average CAD levels come to 2% - 2.5% of GDP in all the aforementioned periods, higher than FY23’s tally at 0.7% of GDP by a meaningful margin.
The surplus was once again supported by Trade Deficit reporting a lower quantum than Remittances and minimal Services deficit. Trade Deficit was reported at US$1.1bn, Remittances clocked in at US$2.2bn. These trade levels were last witnessed eight years ago in Apr-2015 and hence seem less likely to maintain. Also, Services deficit has reported a monthly pace of US$60mn, vis-à-vis historical average of ~US$300mn, on account of lower Sea freight activity.
Balance of Payments (BoP) account turned green again, standing positive at US$1.1bn, limiting FY23 BoP deficit to US$4.2bn. To recall, the deficit had touched a peak of US$6.5bn during 7MFY23. The surplus this month was led by fresh government and bank borrowings and rollovers, in addition to the Current Account Surplus.
Funds availability to continue to be a key factor
The recent Stand-By Agreement with IMF has unlocked US$2bn deposits from Saudi Arabia, US$1bn from UAE and recently US$600mn from China. Including the first tranche of this program, of US$1.2bn, the central bank’s FX reserves are expected to double from ~US$4bn as at Jun-2023 end to ~US$8.5bn within a month (not accounting for any scheduled debt and other payments during the same time).
These numbers still just make a portion of the US$24bn targeted under external sources in Federal Budget FY24 as against govt estimated payments of US$15bn. On the other hand, we expect US$20bn receipts during FY24 (including the recent announcements in Jul-2023) as a more probable scenario, against FCY payment estimates of US$21bn during the same time.
Timing differences aside, on a whole, this leads to limited room for FY24 CAD to surpass Jun-2023 SBP FX reserve levels, in order to avoid volatility in PKR/US$. We believe adhoc measures on controlling FCY outflow may continue to some extent during the year. Any delay in fresh support to foreign exchange reserves increases probability of another round of sharp PKR depreciation against the US$.