Current account surplus of $397 million in December reverses six-month deficit streak

KARACHI: The country posted a current account surplus of $397 million in December, reversing six months of deficits, as a rise in exports and remittances and a fall in imports helped narrow the trade gap, the central bank data showed on Wednesday.

The surplus, which compares with deficits of $15 million in November and $365 million in December 2022, was the first since June 2023, when the country recorded a surplus of $28 million.

The demand for Pakistani goods and services from foreign trading partners increased, the diaspora sent more funds home through official banking channels, and slow domestic demand brought on by record-high interest rates, skyrocketing inflation, soft global commodity prices, and administrative measures reduced imports, all contributed to the country's current account surplus.

December’s balance of payments registered a $1.479 billion surplus after a gap of four months. According to SBP data, the nation's overall exports increased by 21 percent year-on-year to $2.799 billion in December, while its total imports decreased by 4 percent to $4.092 billion.

Remittances increased by 13 percent to $2.381 billion in December. “Significant increase of 21 percent increase in exports along with lower imports and higher remittances are the primary reason for posting current account surplus,” said Muhammad Awais Ashraf, director of research at Akseer Research.

The steady rise in export earnings indicates that, after a year of recession, the apparel and textile industries are starting to receive orders from customers throughout the world. Furthermore, the improvement in Pakistan's overall exports can be explained by a notable increase in information technology exports brought about by SBP initiatives and stable currency, which encouraged IT firms to repatriate their foreign money and deposit it in local accounts.

In the first half of the current fiscal year, the nation reported a current account deficit of $831 million, which is 77 percent less than the same period last year. From July to December of FY24, exports reached $15.289 billion, a 7 percent increase over the same period in the last fiscal year.

Between July and December of FY24, imports fell by 15 percent to $25.241 billion. However, the amount of money sent home by Pakistanis working abroad dropped to $13.435 billion, a 7 percent decline.

The rollover of an existing $2 billion loan for one year from the United Arab Emirates, and Pakistan's $700 million second tranche from the IMF's $3 billion loan programme have helped the nation's foreign exchange reserves. However, the country's fragile economy will continue to face challenges due to large repayments of foreign debt. Pakistan has to repay $24.6 billion in foreign loans this fiscal year.

The government plans to roll over $12.4 billion.

“Timely rollover by the UAE will help stabilize Pakistan FX reserves. Along with this inflow from IMF will give much-needed stability to rupee,” said Topline Securities Limited CEO Mohammed Sohail.

“We have seen stable rupee is helping dollar inflows from RDA [Roshan Digital Account] and IT exports.” The IMF expectsPakistan’s gross reserves to be $9.1 billion by June 2024, up from its earlier estimate of $8.9 billion. Analysts anticipate reserves to be $8-10 billion by June 2024.

The IMF has lowered its prediction for the current account deficit in FY24 from 1.8 percent of GDP ($6.4 billion) to 1.6 percent of GDP ($5.7 billion). The current account deficit is projected by analysts to be between $4 and $5.5 billion.

SBP implements the zero current account deficit policy by directing banks to control imports using their own liquidity, even though record-high interest rates and high prices have already dampened demand, said Optimus Capital Management in a report published this week.

The external repayments for this year seem to be covered, but these indicate that the government is still having trouble attracting enough foreign exchange to support bottomed-out demand, it added.

“Exports might get a rebound. Although world growth is expected to slow down, the drawdown in inventories is anticipated to boost trade. With recent news floating about new competitive tariffs, if implemented, might give a boost to exports from our idle capacities.”