Delayed oil payments to result in deficit

To improve Pakistan’s narrow import cover of six weeks, we understand one of the evident aspirations of Finance Minister Miftah Ismail has been to effectively manage the external account by balancing goods exports and remittances (receipts) to imports (payments).

Where July and August could have been the months that report a surplus balance of the same, the delayed payments on the State Bank of Pakistan’s (SBP) oil imports would result in a deficit.

Since 1973, there have been nine instances where Pakistan’s imports have not exceeded the cumulative of exports and remittances, of which five have been relatively recent, in the last 11 years. The reasons have differed in every occurrence, nevertheless dominated by two key factors, including declining global oil prices limiting a rise in the import bill and/or strengthening remittances.

The constant in this equation has been exports, with the least support to the balance as exports-to-GDP has been declining over the years. We observe this positive balance appearing in three different phases. During the FY02/04, Pakistan witnessed a sharp increase in immigrants, especially to the Middle East; followed by expanding remittance flows. Later in FY15/16, the global oil prices averaged below $50/bbl. Lastly, during FY20/21, the pandemic struck, limiting avenues of the dollar flows other than through the banking system, resulting in higher remittances again.

Our FY23 base case assumption for exports and remittances stands at $59 billion, just $3 billion shy from expected import bill of $62 billion at an average oil price of $97/bbl.

We expect the exports to come in 15 per cent lower on a year-on-year basis, owing to the global recession diminishing textile exports demand, while we keep the remittances flat.

As these estimates pertain to a pre-flood scenario, the import bill may face pressure from additional imports of food and textile segments, expanding imports by $3 to$4 billion. On the other side, the destruction of rural income is also expected to hamper the GDP growth, which may reduce some import-led consumption.

While the goal seems farther than nearer, especially after the catastrophic floods have taken place, the objective can be met if oil prices take a sharp dip. However, we highlight any scenario of a steep oil price decline should not rule out a slower growth pace in remittances, given the avenue concentration from the Middle East. Till then, we expect other efforts such as administrative controls on imports to continue.