Karachi, July 23, 2021 (PPI-OT): Imports at an alarming level; CAD to remain manageable in FY22E
The all-time high monthly imports of US$6.3bn during Jun-2021 (crossing the previous record of US$5.8bn made in May-2018) have created a concerning wave among many quarters of the market, with questions being raised on the external account for FY22E. The monthly import bill is ~35% of State Bank of Pakistan’s foreign exchange reserves, reflecting our import cover dropping from recent average of ~3.5x per month to ~2.9x per month. Nonetheless, recent SBP measures such as TERF are expected to support Pakistan’s external account for FY22E, as we project a CAD around 2.5% of GDP for the year. While a decline in commodity prices (especially oil) remains a key upside risk to our estimates, we do not rule out the possibility of restricted trade from potential export countries given uncertainty over the Delta variant COVID cases in the near future, standing as a key risk to our base case.
Jun-2021 CAD reaches 30 month high
The Current Account Deficit (CAD) for Jun-2021 clocked in at US$1.6bn (-6.5% of GDP), the highest monthly deficit since Dec-2018. The surge in CAD was primarily on the back of higher imports during the month, netting off any support from increasing exports and remittances. Cumulatively, the balance, which had remained in a surplus for the better part of the year, turned to a deficit, clocking in at US$1.9bn (-0.6% of GDP) for FY21.
Jun-2021 marks an all-time high import bill
While it is important to note that all imports are not a burden, bifurcation of the growth in imports of Jun-2021 (PBS) still reflects a tilt towards consumption-led sectors. Imports under the (1) Palm oil, (2) Auto and related industries and (3) Steel segments have been the key drivers of the consumption-led import growth, which cumulatively amount to ~20% of total import bill. In addition, Petroleum imports that account for ~25% of the import bill still reflects an average price of US$66/bbl.
On the other hand, investment-led imports such as machinery and raw cotton imports are other key factors of the substantial increase in imports. However it may be noted that they only carry ~15% weight (ex-power machinery and mobile phones) in the total bill.
Imports yet to report a higher number
Going forward, we believe mounting commodity prices are a key risk to the import bill of FY22E, where incentives offered by the incumbent government in consumption sectors such as autos are an added threat. Oil imports at ~US$70/bbl will reflect in the months ahead. In addition, factors such as (1) continuing steel imports as raw material for consumer sectors and (2) higher demand of autos post implementation of the new Auto Policy are also bound to increase the import bill in the coming months, which are evidently counter- productive to the dollar spending for a net importing country.
Conversely, machinery and raw cotton imports would have a multiplier effect on exports of the country; however it may take some time to materialize. We highlight TERF to the tune of ~US$2.8bn have been approved up to Mar-2021, which has reportedly been broadly lent to export-oriented sectors. As a result, we expect FY22E imports to clock in at US$64bn. Key upside risk to our estimates is decline in commodity prices, especially oil. With every 6% (~US$4/bl) increase/decrease in oil prices, the annual import bill would change by ~US$1bn accordingly.
Hopes of external support pinned on exports
After 18% YoY higher exports in FY21 (PBS) we anticipate FY22’s export to cross US$30bn (+17% YoY), supported by TERF projects. To note, Jun-2021 export receipts in goods have also reached to a record high of US$2.7bn, owing to higher textile exports (~60% of total exports). With US$1.7bn recorded in Jun, we expect a sustainable US$1.5bn monthly export from the textile sector. Nonetheless, key downside risk emits from restricted trade from potential export countries with uncertainty over the magnitude of Delta variant COVID cases.
FY22E CAD may restrict to 2.5% of GDP
All said and done, we expect Trade deficit from goods to aggregate to US$34bn during FY22. Moreover, we expect IT Exports to contribute more than US$200mn per month, restricting Trade Deficit on Services to US$2bn for FY22E.
On the remittances front, we anticipate a monthly average of US$2.4bn to accumulate FY22 remittances to ~US$29bn, reporting no growth YoY as we expect normalized travel to set off prospective growth from Roshan Digital Account in the fiscal year.
Resultantly, our FY22E CAD projection comes to US$8bn, clocking in at historical average of 2.5% of GDP. Support from higher exports and stagnant remittances are expected to keep the average PKR depreciation in the range of 5% during FY22.