Tuesday July 23, 2024

Current account swings back to deficit in May

By Erum Zaidi
June 22, 2024
This Image shows US dollar banknotes. — AFP/File
This Image shows US dollar banknotes. — AFP/File

KARACHI: Pakistan’s current account swung to the red in May, mainly due to a jump in the repatriation of profits and dividends by foreign companies, according to data from the central bank released on Friday.

The country recorded a current account deficit of $270 million in May, following surpluses in the previous three months. In the prior month, the current account balance showed a surplus of $499 million, and in May last year, a surplus of $155 million.

The latest balance of payments figures defied analysts’ expectations, as they had anticipated a surplus in the current account for May.The large dividend payments to overseas investors and interest repayments resulted in the highest-ever monthly outflow of $1.4 billion in the primary income account in May.

“The main reason is the expansion in primary income deficit due to a substantial rise in primary income debit. This is likely because of upward adjustment in profit associated with foreign investments,” said Maaz Azam, an analyst at Optimus Capital Management.

Governor of the State Bank of Pakistan Jameel Ahmad had informed analysts during a post-monetary policy briefing that the SBP had cleared most of the backlog of dividends and profit repatriation.

Awais Ashraf, director of research at Akseer Research, mentioned that in addition to higher dividend/profit repatriation, the high trade deficit of goods also contributed to a current account gap. The SBP allowed $1 billion in dividends or profit repatriation payments during May.

The country’s total imports increased by 13 per cent month-on-month (MoM) to reach $5.047 billion in May. Comparing year-on-year (YoY), imports rose by 35 per cent in May. Exports also saw an increase, totalling $3 billion in May, which was up by 14 per cent from the previous month and 17 per cent from the same period last year.

Remittances from Pakistani expatriates rose to $3.24 billion in May, marking a 15 per cent increase from the previous month and a 54 per cent surge from a year earlier.

The SBP data showed that the country’s current account gap narrowed by 88 per cent to $464 million in 11 months (July-May) of the current fiscal year.

The latest balance of payments figures were released at a time when there is growing expectation that Pakistan will secure a new and longer loan from the International Monetary Fund next month.

Fitch Ratings, in its latest report, stated that Pakistan’s main credit challenges still revolve around external liquidity and funding, despite its stable debt situation. The report also mentioned that finalizing a new IMF deal will support other external funding. However, maintaining the necessary strictpolicy measures to manage external financing needs and to comply with a new Extended Fund Facility may become increasingly challenging.

Since February’s election, Pakistan’s external position has continued to improve. The current account deficit is expected to narrow to 0.3 per cent of the GDP (just $1 billion) in FY24 from 1.0 per cent in FY23.

This improvement is due to subdued domestic demand leading to reduced imports, as well as exchange rate reforms attracting remittance inflows back to the official banking system, as mentioned in the report.

Additionally, strong agricultural exports have contributed to the improvement. As of June 14, Pakistan’s foreign exchange reserves held by the central bank have remained at $9.135 billion -- sufficient to cover over two months of imports.

“However, Pakistan’s projected funding needs still exceed reserves, at about $20 billion per year in FY24-FY25, including maturing bilateral debt that we expect will continue to be rolled over,” the report said.