Pakistan’s current account (CA) posted its first deficit in four months in May 2024, slipping to USD 270 million from a surplus of USD 499 million the previous month.
The current account deficit in FY24 11MFY increased to $464 million against a deficit of $3.8 billion in the same period last year.
The large primary income deficit of $1.4 billion was the main reason for the negative figure, without which the current account would have been comfortably in surplus despite the widening trade deficit.
The primary deficit swelled to $1.4 billion (a record high) due to payments worth $1.5 billion. These payments included interest on foreign debt and outstanding dividends from multinational companies. The latter has been almost completely resolved, which should ease the basic income deficit to around $500 million in the coming months, according to the central bank.
The goods trade deficit in May was reported at US$2 billion, up from US$1.8 billion in April and double from a year earlier.
Imports were US$5 billion, the highest level so far in FY24, up 13% from the previous month and 35% from the previous year.
The sequential increase in imports was driven by a seasonal increase in oil imports (up 8% month-on-month) and a 12% increase in machinery imports. Iron and steel imports (scrap and other raw materials) increased 40% year-on-year.
This is also seasonal and does not signal a sustained recovery in construction activity (down 3% y/y in 11QFY24).
Exports were strong, increasing 17% year-on-year, driven mainly by textile products (seasonal products up 18% year-on-year) and food products (up 55% year-on-year; rice exports doubled year-on-year).
Remittances in May rose an impressive 15% month-on-month and 54% year-on-year to US$3.2 billion ahead of the Eid Al Adha holiday, and we believe they are likely to normalize to around US$2.5 billion over the coming months.
SBP’s foreign exchange reserves were reported at $9.1 billion.
SBP’s foreign exchange reserves remained stable at around USD 9.1 billion as of mid-June 2024, equivalent to about two months of imports.
The SBP initiated a 150 bps rate cut in June, taking the policy rate to 20.5%.
Many industries (cement, automobiles, steel) are operating at very low capacity (50-60%) and any increase in imports is likely to increase the trade deficit.
Tough budgetary measures for the real estate and textile sectors are likely to extend the period of weak demand for a few more months (import growth will remain moderate).
A Canadian dollar exceeding $500 million would be a significant risk and could have adverse effects on exchange rates, inflation and monetary policy.
