Karachi, June 29, 2022 (PPI-OT): May-2022 CAD rises 2x MoM over lower remittances

Current Account Deficit for May-2022 clocked in at US$1.4bn, expanding 2x MoM. The culprit of expanding deficit was not higher imports but a US$800mn seasonal decline in remittances. 11MFY22 CAD totaled US$15.2bn, maintaining the monthly average at US$1.4bn and keeping our FY22 estimates intact at US$16.2bn (4.5% of GDP).

SBP reported imports at US$5.7bn, came in US$1bn lower compared to PBS imports, the largest gap witnessed during this calendar year, versus monthly average of ~US$350mn. Imports fell 9% MoM over 21% MoM decline in oil imports and 7% MoM lower Machinery imports, the two key segments that make more than 40% of the import bill.

We estimate CAD for FY23 to clock in at US$14.2bn (-3.6% of GDP), assuming average oil at US$90/bl, where upside to our estimates are (1) recent regulatory measures to curb luxury imports and (2) lower POL products demand over additional levy and taxes on its consumer prices.

May-2022 CAD escalates to US$1.4bn, up 2x MoM

The Current Account Balance for May-2022 clocked in at a deficit of US$1.4bn, expanding 2x as compared to the previous month. For once, the culprit of expanding deficit was not higher imports, and the blame fell on seasonal decline in remittances. While the trade deficit contracted 12% MoM, remittances witnessed a sharp decline of 25% MoM or by almost US$800mn. To recall, remittances for Apr-2022 marked a high base with an all-time high at US$3.1bn, partly because of increase in immigration for employment by GCC economies as well as boosted flows ahead of Eid season. For the cumulative period, the Current Account Deficit (CAD) for 11MFY22 totalled to US$15.2bn, maintaining the monthly average at US$1.4bn as well and keeping our FY22 estimates intact at US$16.2bn (4.5% of GDP).

Oil imports decline 21% MoM

This month, SBP’s imports at US$5.7bn came in US$1bn lower to PBS imports, the largest gap witnessed during this calendar year, versus monthly average of ~US$350mn. Imports fell 9% MoM over 21% MoM decline in oil imports and 7% MoM lower Machinery imports, the two key segments that make more than 40% of the import bill.

Exports also witnessed a declining trend, reducing 21% MoM to US$2.5bn, the lowest monthly export number in seven months. Despite Textile exports, almost 60% of the pie, slightly trimming by 3% MoM, the 39% MoM decline in non-Textile exports dent the tally this month.

Outlook

We estimate CAD for FY23 to clock in at US$14.2bn (-3.6% of GDP). We limit export growth to 10% YoY on a higher base and potential shortfalls amid the energy situation. On the other hand, our import bill assumptions incorporate a US$90/bl oil, keeping the import bill stagnant. We also expect muted growth in remittances.

Upside to our estimates are the recent regulatory measures such as curb on selective imports and increase in duties announced in the Budget, alongside overall fiscal consolidation that may keep consumption-led imports in check. Moreover, higher POL prices also increase the possibility of a relatively lower demand for POL product imports in FY23.