Current account deficit drops to $681m in FY24, lowest in 13 years

KARACHI: Pakistan’s current account deficit in the fiscal year 2024 shrank to its smallest in 13 years, the central bank data showed on Friday, thanks to a decline in the trade deficit and a rise in remittances.

The country recorded a current account deficit of $681 million in FY24, the lowest since FY11, marking a 79 per cent reduction from the previous year’s $3.3 billion shortfall. As a percentage of the overall economy (gross domestic product), the deficit decreased from 1.0 per cent in FY23 to 0.2 per cent in FY24.

Analysts noted that the average current account deficit over the last five and 10 years was $8.3 billion (2.6 per cent of the GDP) and $8.4 billion (2.7 per cent of the GDP) respectively, underscoring the significance of the recent decline.

According to the State Bank of Pakistan’s data, the goods trade balance improved by 11 per cent to $22 billion in the July-June FY24 period, mainly because of a 12 per cent increase in goods exports to $31 billion and a mere 1.0 per cent increase in imports to $53 billion. The services trade deficit increased by 122 percent to $2.3 billion due to a 17 percent rise in services imports to $10 billion, while exports increased by only 3.0 per cent to $7.8 billion.

Remittances from Pakistanis working abroad rose by 11 per cent to $30.2 billion in FY24.“Remittances showed impressive growth of around 30 per cent YoY in 2HFY24 while showing a decline of 5.0 per cent YoY in 1HFY24. The rebound in 2H is attributed to currency and economic stability, which discouraged dollar savings/hoarding, we believe,” said an analyst at Topline Securities.

The deficit in June widened to $329 million, which is 33 per cent higher than the previous month. According to analysts, the deficit exceeded expectations due to a higher balance on the primary deficit of $1.1 billion, driven by the repatriation of dividend payments by overseas investors.

The primary deficit in FY24 reached $8.6 billion, the highest ever in the history of Pakistan. An analyst at Topline Securities said that 85 per cent of the FY24 deficit was seen in the last two months, May and June, due to a significantly higher primary deficit, averaging $1.3 billion per month compared with an average of $593 million in the first 10 months.

He believes that the higher primary deficit in the last two months is attributed to the clearance of dividend/profit repatriation by the central bank, as was also indicated in the last analyst briefing of the central bank.

The latest balance of payments figure is in as Pakistan and the International Monetary Fund have recently agreed on a 37-month $7 billion loan programme.

Analysts anticipate that the current account deficit will be around $5 billion or 1.2 per cent of the GDP in FY25, with remittances amounting to $32 billion. However, a recent report by global rating agency Fitch suggests that despite Pakistan’soverall current deficit remaining small at an average of just 1.1 per cent of the GDP over the next five years, the country may face challenges in financing this deficit.

The country has built up significant external liabilities. This includes both official debt issued by the state and private debt owed by non-financial corporations. Except for the central bank’s (limited) reserves, the economy has few FX assets, it said.

“We expect that Pakistan will remain dependent on imports to meet a large share of its domestic energy and consumer goods needs. While remittances from the country’s large diaspora will help cover these imports, we expect that the current account will remain in deficit over the duration of our forecast period,” it said.“FDI inflows will not be sufficient to cover this shortfall, which will leave the country dependent on portfolio inflows and foreign borrowing,” it added.