C/A deficit=higher NDA=sticky interest rates

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Pakistan’s current account (C/A) deficit tally for 10MFY12 came in at US$3.34bn vs a current account surplus of US$466mn reported in the corresponding period last year. The deficit was led by higher import growth of 14.5%YoY while exports remained flat. Additionally, due to lackluster financial account flows the SBP was forced to use up reserves to bridge the current account deficit. As a result, SBP’s gross reserves dipped to US$13.28bn from last year’s level of US$15.47bn. This is further validated from the monetary aggregate sheet, where the SBP reported a contraction of Net Foreign Assets (NFA) by Rs272bn vs an expansion of Rs181bn last year. The sustained contractions in NFA have sharply deteriorated the NFA to NDA ratio and in turn worsened the rupee dollar exchange parity. This led to the entire borrowing burden being shifted on the domestic sources. Hence, the SBP had preferred to adopt a wait & watch policy over the past two reviews while intelligently managing to strike a balance between growth and inflation, in our view.

 

C/A deficit stands at US$3.34bn in 10MFY12

The balance of current account deteriorated in 10MFY12, further adding to the balance of payment worries in the absence of financial account flows. Poor financial account performance lingered in FY12 so far with only US$1.2bn being received in 10M. The current account deficit came in at US$3.34bn during the period under review. To recall, Pakistan witnessed a surplus of US$466mn last year which was led by higher export growth. Export growth this year stagnated due to massive dip in cotton prices in the international markets and recession in Europe & USA while Pakistan’s reliance on imported oil for electricity generation coupled with higher international oil prices caused the import bill to swell extraordinarily. Encouragingly remittances graph, once again, surged by 20% from last year, mitigating the marks of higher trade deficit. Other than remittances rest of foreign inflows remained subdued. FDIs registered a paltry sum of US$668mn this year as against US$1.29bn last year. While loan disbursements came in at US$1.58bn vs last year’s level of US$1.67bn. Overall, SBP’s reserves position came substantially under pressure during the period under review and dipped to US$13.28bn compared to US$15.47bn last year.

NFA to NDA deteriorated substantially

The sustained contractions in NFA sharply deteriorated the NFA to NDA ratio in turn worsening the rupee dollar exchange parity. Already in the current fiscal year, the rupee has depreciated 6.6% against US$. The SBP reported a contraction of Net Foreign Assets (NFA) by Rs272bn vs an expansion of Rs181bn last year. The gap in liquidity was bridged by domestic borrowings. The SBP reported borrowings for budgetary support at a hefty Rs1.08trn, contributed by both scheduled banks and the SBP. Borrowing from the SBP stood at Rs442bn (vs Rs217bn in FY11), while scheduled banks exposure to government increased by Rs642bn in FY12 (Rs385bn last year). Private sector borrowings grew in tandem with the government borrowings during the period under review however, higher government borrowings have now left little room for the private sector to borrow. In 10MFY12, private sector credit offtake increased to Rs234bn from last year’s level of Rs107bn. However, overall M2 growth for 10MFY12 remained subdued at 9.09% compared to 11.47% last year. The difference between the two years’ money growth is owing to NFA contraction & retirement of public sector loan through issuance of TFCs to banks. Lastly, the balance of inflationary expectation due to higher international oil prices and the entire borrowing burden being shifted on the domestic sources has led to the SBP preferring a wait & watch policy approach over the past two reviews.

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