Pakistan’s Current Account Deficit for July 2024

Pakistan’s Current Account Deficit in July 2024: An Overview

In July 2024, Pakistan recorded a current account deficit (CAD) of $162 million, slightly higher than market expectations and the 12-month average but still within the targeted range. This deficit was primarily due to increased imports of goods to support economic activities and a significant repatriation of profits and dividends by foreign firms operating in Pakistan. However, robust inflows of workers’ remittances and a rise in export earnings, particularly in the technology sector, helped offset the deficit.

Key Data Highlights

According to the State Bank of Pakistan (SBP), the current account deficit in July 2024 was significantly reduced by 78% compared to the $741 million deficit recorded in the same month last year. This also marks a 38% decrease from the previous month (June 2024), which saw a deficit of $313 million. Notably, this is the third consecutive month of a current account deficit.

For the fiscal year 2023-24 (FY24), the CAD was $665 million, equivalent to 0.2% of GDP, an almost 80% reduction from the $3.27 billion deficit in FY23. The monthly average CAD for FY24 was $55.41 million, making the $162 million deficit in July 2024 three times higher than the 12-month average. Despite this, the deficit remains within the projected limit of 0-1% of GDP (approximately $300 million per month) for FY25.

Factors Contributing to the Deficit

Tahir Abbas, Head of Research at Arif Habib Limited, highlighted the impact of workers’ remittances on narrowing the current account deficit. He noted that a 20% increase in the trade deficit to $2.4 billion, driven by a surge in imports, was the primary factor behind the July 2024 CAD. However, a 48% year-on-year increase in workers’ remittances to $3 billion helped offset a significant portion of the deficit.

Abbas projected that the government would continue to take measures to keep the current account deficit within manageable limits throughout FY25. The import-led domestic economy cannot afford a larger deficit due to low foreign exchange reserves. The government has adopted a strategy to ensure that import payments do not exceed export earnings and remittances, aiming for sustainable economic growth until foreign exchange reserves are adequately bolstered.

Challenges and Risks Ahead

While the inflows of foreign currencies are significant, foreign debt repayments and interest payments consume a substantial portion of these inflows each month. The situation could improve with a rise in export earnings and further growth in remittances.

However, Abbas cautioned that the uptrend in global commodity prices, particularly petroleum products, could destabilize the economy. Any deviation from the current strategy to control imports within available resources could revive the balance of payments crisis and destabilize the rupee-dollar parity.

Trade and Investment Insights

In July 2024, Pakistan’s goods imports rose by 16% to $4.82 billion, compared to $4.14 billion in the same month last year. Meanwhile, goods exports improved by 13%, reaching $2.39 billion, up from $2.12 billion in July 2023.

The elevated repatriation of profits and dividends led to a 25% increase in the balance of primary income, which rose to $727 million from $584 million.

On the investment front, Pakistan attracted $136 million in foreign direct investment (FDI) in July 2024, a 64% year-on-year increase. However, this was a 19% decline compared to June 2024. China remained the leading investor, contributing $45 million, followed by Hong Kong with $42 million, and the United Kingdom and the United States with $22 million and $13 million, respectively.

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

Conclusion

Pakistan’s current account deficit in July 2024 reflects the ongoing challenges of balancing imports with export earnings and remittances. While the government is taking steps to manage the deficit, external factors such as global commodity prices and foreign debt obligations remain significant risks. Continued efforts to boost export earnings and maintain strong remittance inflows will be crucial for sustaining economic stability.