Current account deficit narrows as remittances rise

KARACHI: Pakistan’s current account deficit shrank in the first month of FY2025 owing to an increase in remittances and improvements in the balance of primary income, the central bank data showed on Monday.

The current account deficit reduced to $162 million in July, down 78 per cent from a year earlier and 48 per cent on a month-on-month basis.The July deficit was higher than expected due to a trade deficit of $2.4 billion reported by the State Bank of Pakistan (SBP), compared with $1.97 billion reported by the Pakistan Bureau of Statistics (PBS). This is contrary to the usual trend where SBP deficit numbers are lower than PBS numbers.

Analysts mentioned that the current account deficit continued due to dividend and profit payments to overseas investors. Saad Hanif, head of research at Ismail Iqbal Securities, indicated that the current account deficit shrank primarily because of strong inflows of remittances from overseas Pakistanis and improvements in the balance of primary income.

“Many analysts, considering these positive factors and the robust remittance figures for July, had anticipated a potential surplus. However, the deficit persisted due to interest payments,” Hanif added. The SBP’s data showed that remittances increased by 48 per cent to $3 billion in July. The country’s total exports rose by 13 per cent to $2.391 billion in July, while imports increased by 16 per cent to $4.819 billion.

The balance of primary income rose by 36 per cent month-on-month to $727 million in July, and it also rose by 25 per cent year-on-year.Maaz Azam, an analyst at Optimus Capital Management, stated that the current account deficit remained low, despite the trade deficit reaching a 22-month high in July. This was due to strong remittance and a normalizing primary deficit.

“Further, trade service deficit also remained low at $159 million mainly due to lower freight from last year and 34 percent YoY higher IT exports,” Azam said.Pakistan’s external position improved as the SBP’s foreign exchange reserves remained stable at $9.27 billion as of August 9, despite ongoing debt repayments. According to the SBP, there are no import restrictions, and IT exports have significantly increased.

The reduction in the current account deficit and limited increase in foreign currency borrowings led Pakistan’s external debt to the gross domestic product (GDP) ratio to decrease to 26 per cent in the last fiscal year. However, the final approval for Pakistan’s $7 billion loan programme from the International Monetary Fund is still pending as the necessary rollovers have not been fully obtained. The internet interruption severely affects the IT sector and may result in decreased technology exports in the coming months.

The installation of a firewall that is reportedly causing severe internet outages throughout the nation has prompted numerous multinational corporations (MNCs) to either prepare to relocate their back offices from Pakistan or have already done so, according to the Pakistan Business Council.

This migration reflects a deepening lack of confidence in the government’s economic policies. Key factors contributing to this trust deficit include the high cost of doing business, political uncertainties, soaring electricity costs, and deteriorating law and order.