Lahore - The country has reported a current account deficit of $416 million in Oct 2015 compared to surplus of $299 million in preceding month mainly due to 13 percent lower remittances and influx of CSF payment last month. On annual basis, CAD inflated by 56 percent compared to $266 in Oct 2014.

At the same time, annual uptick in CAD can be attributed to realization of lower amount under ‘current transfers’ (down 67 percent). Cumulatively, 4MFY16 CAD position remained encouraging, posting a decline of 72 percent YoY to $532m where the stark improvement was primarily driven by 26 percent YoY lower total trade balance owing to 17 percent decline in import of goods and services.

According to experts, overall BoP position remained in the surplus of $826m in 4MFY16 compared to deficit of $643m in 4MFY15. Going forward, we expect CAD to remain in the vicinity of 0.6 percent-0.7 percent of GDP on account of i) lower import bill amid expectation of 38 percent YoY lower average oil price and ii) healthy trend in remittances. At the same time, we rule out further depreciation in PKR/USD (already down 3.6 percent FYTD) owing to i) lower CAD and ii) materialization of remaining external flows, keeping total forex reserves well above $20b by Jun’16 end. Beyond FY16, we believe i) end of CSF and IMF disbursements and ii) start of loan repayments will likely raise serious concerns on the sustainability of external account.

Experts said that textile exports witnessed a dismal start to fiscal year 2015-16 where 2MFY16 exports were down by 2 percent compared to the corresponding period last year. One factor contributing to this decline was higher depreciation witnessed in regional currencies against USD in 2MFY16 where INR and CNY depreciated by 4 percent as opposed to PKR’s depreciation of 2 percent. The situation was stabilized in Sept 2015 where PKR depreciated by 1 percent while the regional currencies witnessed an average appreciation of 0.4 percent. This led the 1QFY16 depreciation to reach 3 percent in 1QFY16 vis-à-vis regional currencies depreciation of 4 percent in the same period. The rupee depreciation was expected to mitigate the dwindling exports but it had little effect as 1QFY16 textile exports were down by 6 percent YoY compared to the corresponding period last year owing to tepid international demand due to Euro-zone economic crisis. The recent depreciation of EUR by 6 percent against PKR holds repercussions for the demand of textile exports to EU. At a time where slowing global economic growth engine in confluence with depreciating EUR has taken a toll on Pakistan’s textile exports, 250bps lower effective interest rate in FY16 will provide some respite to the sector.

Experts expect volumetric increase in 2QFY16 exports owing to the seasonal impact of Christmas. However, the EU economic slowdown will affect the export demand and may limit the aforesaid recovery in export volumes.