Current account surplus widens to highest in 13 months in April

KARACHI: The current account surplus widened to its highest level in 13 months in April, buoyed by a narrowing trade gap and increased remittances from overseas workers, data from the State Bank of Pakistan showed on Friday.

The current account surplus reached $491 million in April, the highest level since March 2023, up 13 percent from the previous month. When compared with last year, the surplus increased by 266 percent.

The country's current account deficit for the 10 months (July-April) of this fiscal year was minimal at $202 million, a 95 percent decrease from $3.920 billion in the same period last year.

Amid ongoing contractionary monetary and fiscal policies, improved agricultural output, and an easing of global commodity prices, the nation's current account balance recorded advances for the third consecutive month. Even if continuous current account surpluses point to signals of stability in the economy, a decline in imports with a downturn in demand has had an impact on economic activity and raised the unemployment rate in the country.

“This [April] surplus came higher than our expectations as SBP reported a much lower trade deficit than PBS (72 percent of PBS) compared to a 10-MFY24 ratio of 90 percent,” said Topline Securities in a note.

Director of research at Akseer Research Awais Ashraf explained why the current account surplus has widened: higher exports along with lower imports contributed to an increase in the surplus.

In April, the nation's overall goods exports grew by 4 percent month-on-month and by 23 percent year-on-year to $2.634 billion. The amount of imports rose to $4.447 billion, up 23 percent from a year ago but down 3 percent from a month earlier.Remittances from Pakistani citizens employed abroad increased by 28 percent year-on-year to $2.812 billion in April, however, they decreased by 5 percent from the same month a year ago.

The latest figures for the balance of payments came as Islamabad is in talks with the International Monetary Fund for a new, longer-term loan programme.

Pakistan’s foreign exchange reserves held by the central bank stood at $9.1 billion as of May 10. The receipt of the final tranche of $1.1 from the IMF under its $3 billion loan programme, which concluded last month, has put the reserves in a comfortable position. The SBP was able to make its external payments on time while building reserves because of improvement in the current account deficit and financial inflows.

The IMF in its staff report following the second and final review under the standby arrangement (SBA) said downside risks remain exceptionally high. Political unpredictability persists despite the new government's stated aim to uphold SBA policies. The international lender also mentioned that the high cost of living and political complications could have an impact on policy. Policy lapses combined with less external funding could jeopardise the debt sustainability route and put pressure on the exchange rate.

The SBP expects the current account deficit in the range of 0.5 - 1.5 percent of GDP; however, the IMF projects the CAD at $3.0 billion (0.8 percent of GDP) for FY24.

“A more muted import rebound is now expected, reflecting favorable commodity price changes and a larger than anticipated drop in food and cotton imports given the domestic agricultural recovery, while exports are slightly higher,” it said.

“Staff expects the CAD to remain around 1½ percent of GDP over the medium term, reflective of a flexible exchange rate consistent with efforts to rebuild reserves.”The SBP, in its latest report said on external account, slightly improved global outlook and domestic growth prospects are anticipated to boost foreign exchange earnings from exports and remittances.

“While resilient global demand may have a positive impact on Pakistan’s exports, moderating global commodity prices may significantly suppress import prices, leading to an overall contraction in import bill and, hence improvement in trade balance,” the SBP said.“This outlook remains susceptible to unfavorable movement in international commodity prices and continued tight global financial conditions,” it said.

“Under these circumstances, it is imperative to boost exports through reforms aimed at enhancing productivity and attracting FDI in export-oriented sectors to keep the CAD at sustainable level without constraining domestic economic activities.”