C/A deficit hits $162 million in July

KARACHI:

Pakistan posted a current account deficit (CAD) of $162 million in the first month (July) of the current financial year 2024-25, slightly exceeding market expectations and the last 12-month average, but still well within the target range.

The current account deficit has arisen due to increased imports of goods to support economic activities and apparent increased repatriation of profits and dividends by foreign companies operating in Pakistan to their headquarters abroad. However, strong inflows of workers’ remittances sent by Pakistanis abroad and a rise in export earnings, led by technology exports, partially offset the shortfall, narrowing it to $162 million for the month.

According to State Bank of Pakistan (SBP) data, the current account deficit narrowed significantly by 78 percent in July compared to $741 million in the same month last year. It also represents a 38% decrease compared to the previous month of June, which recorded a deficit of $313 million, marking the third consecutive month of a current account deficit.

For the full fiscal year 2023-24 (FY24), the current account deficit stood at $665 million (0.2% of GDP), which was nearly 80% lower than the $3.27 billion deficit recorded in in the 23rd year. The CAD monthly average for FY24 was $55.41 million, indicating that the deficit of $162 million in July 2024 is three times the average of the past 12 months. However, this latest deficit is still within the projected range of 0-1% of GDP (about $300 million per month) for the 25th year.

Tahir Abbas, Head of Research at Arif Habib Limited, told The Express Tribune that “strong worker remittance inflows are a game-changer, narrowing the current account deficit within manageable limits.” He explained that the 20% widening of the trade deficit to $2.4 billion, due to the marked increase in imports in July compared to the same month last year, led to the current account deficit. However, a 48% rise in workers’ remittances (year-on-year) to $3 billion offset much of the shortfall.

Abbas predicted that the government would continue measures to keep the current account deficit within manageable limits throughout the 2024-25 fiscal year as the import-driven domestic economy cannot afford to run a larger deficit. to support aggressive economic growth amid low foreign reserves. He pointed out that the government has adopted a strategy to ensure that payments for imports do not exceed the sum of export earnings and worker remittance inflows. This approach aims to achieve sustainable economic growth until foreign exchange reserves are strengthened beyond current requirements.

Abbas noted that while foreign currency inflows remain significant in the domestic economy, significant foreign debt repayments and interest payments consume a significant portion of these inflows each month. The situation will improve with a significant increase in export earnings and further increase in workers’ remittances.

He warned that the upward trend in global commodities, particularly oil products, could jeopardize the stabilized economy. Moreover, any break in the current strategy to control imports within available resources could revive the balance of external payments crisis and destabilize the rupee-dollar exchange rate.

In July, goods imports rose 16% to $4.82 billion compared to $4.14 billion in the same month last year. Meanwhile, merchandise exports improved 13 percent to $2.39 billion from $2.12 billion in the same month a year earlier.

Increased repatriation of profits and dividends led to a 25% increase in remaining primary income, which rose to $727 million from $584 million.

Increase in foreign direct investment

Topline Research reported that Pakistan attracted $136 million in FDI in July 2024, up 64 percent year-on-year, though down 19 percent compared to the previous month.

China, the world’s second largest economy, remained the top investor in Pakistan, with $45 million in July, followed by Hong Kong with $42 million. The United Kingdom and the United States invested $22 million and $13 million, respectively.

The power sector attracted the largest FDI at $62 million, followed by $30 million in oil and gas exploration and $20 million in the financial sector.