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JS Securities Limited – JS Research (August 25, 2022)

Karachi, August 25, 2022 (PPI-OT): CAD trend likely to remain above US$1bn/month

CAD for July clocked in at US$1.2bn (-43% MoM), close to the 12-month prevailing average of US$1.5bn/month and higher than the anticipation built by the 17-month low trade deficit reported by Pakistan Bureau of Statistics (PBS).

The CAD readings came in as a negative surprise over anomaly between SBP and PBS imports where SBP imports came in US$400mn higher than PBS’, as against usual trend of $US300-400mn lower imports than PBS on a monthly basis. The higher SBP imports were driven by US$1bn higher petroleum import bill by SBP as compared to PBS.

Assessing data of the last two decades, we believe the wide gap of ~US$750mn in SBP-PBS Petroleum imports in Jun-2022 would reflect in Aug-2022’s SBP import bill, keeping CAD levels above US$1bn again and partially offsetting the impact of ongoing administrative import controls, increase in duties on luxury imports and declining domestic demand.

Downtrend in PBS imports fail to lower CAD in Jul-2022

Pakistan Bureau of Statistics (PBS) reported a 17-month low trade deficit in Jul-2022 (US$2.7bn), led by a sharp decline in imports and building an anticipation of a lower Current Account Deficit (CAD) for Jul-2022. On the contrary, CAD for July clocked in at US$1.2bn (-43% MoM), close to the 12-month prevailing average of US$1.5bn/month.

The CAD readings came in as a negative surprise over anomaly between SBP and PBS imports where SBP imports came in US$400mn higher than PBS as against $US300-400mn lower imports than PBS usually witnessed on a monthly basis. Moreover, absence of seasonal effect in Remittances also led to a higher than estimated CAD. Expanding CAD and more than US$800mn outflow from the Financial Account led to Balance of Payment reducing by US$1.8bn, which was also reflected in SBP’s foreign exchange reserves that declined from US$9.8bn to US$8.4bn in July.

Lagged outflows may counterweigh ongoing import controls

Upon digging deeper, the key difference has been reported in Petroleum imports of both sources, where the segment’s imports reported by SBP is typically US$400mn lower than PBS figures each month. In Jul-2022, SBP’s Petroleum imports have been reported US$1bn higher than PBS numbers. This can partially be reasoned with separate accounting treatment – SBP (cash) versus PBS (accrual). To recall, May-2022 import bill reflected a huge gap in the opposite direction, where SBP Petroleum imports amounted US$1.3bn lower than PBS’. Assuming a normalized difference in the same, July’s CAD readings would have come much below US$500mn.

Assessing data of the last two decades, the wide gap of ~US$750mn in SBP-PBS Petroleum imports for Jun-2022 is likely to reflect in Aug-2022’s SBP import bill. This may keep Aug-2022 CAD levels similar to July, despite the ongoing administrative import controls, increase in duties on luxury imports and declining domestic demand. Having said that, the aforementioned measures and efforts are likely to contribute towards lower monthly CAD figures from 2QFY23, which would be an upside to our CAD FY23 estimates of US$13bn (3.1% of GDP).

js-securities-limited-js-research-august-25-2022

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