Pakistan: Current Account turns negative

Pakistan’s current account (CA) posted the first deficit in four months in May 2024, of US$270 million against a surplus of US$499 million a month ago.

CA deficit during 11MFY24 grew to US$464 million against a deficit of US$3.8 billion in the corresponding period last year.

A large primary income deficit of US$1.4 billion was the key reason behind the negative figure, without which CA balance would have been comfortably positive, despite a wider good trade deficit.

The primary deficit ballooned to US$1.4 billion (highest ever level) due to US$1.5 billion worth of payments. These payments included interest on foreign debt and backlog of dividends of multinational companies. As per the central bank, the latter has been nearly completely settled; hence the primary income deficit should moderate to around US$500 million in the coming months.

Goods trade deficit was reported at US$2.0 billion in May, higher than US$1.8 billion in April and doubling YoY. 

Imports of US$5.0 billion were at the highest level in FY24 to date, up 13%MoM and 35%YoY.

The sequential growth in imports was led by seasonally higher petroleum imports (up 8%MoM) and 12% higher machinery imports. Iron & Steel imports (scrap and other raw materials) rose 40%YoY.

This is also seasonal and does not point to a sustainable rebound in construction activity (down 3%YoY in 11MFY24). 

Exports were up a healthy 17%YoY, mainly driven by exports of textiles (up 18%YoY, seasonal) and food (up 55%YoY. Rice exports doubled YoY).

Remittances in May were an impressive US$3.2 billion, up 15%MoM and 54%YoY, ahead of the Eid-ul-Adha holidays, likely to normalize to around US$2.5 billion in the coming months, in our view.

SBP’s Forex reserves were reported at US$9.1 billion

SBP’s Forex reserves remained flat around US$9.1 billion by mid-June 2024, equivalent to just about two months’ imports.

The SBP began cutting interest rates in June, by 150bps, taking the policy rate to 20.5%.

Many industries (cement, autos, steel) are operating at very low utilization levels (50-60%); any likely increase in imports could increase trade deficit.

Tough budgetary measures for the real estate and textile industries may extend the spell of weak demand a few more months (keeping the growth in imports moderate).

CAD crossing US$500 million is a key risk and can have negative implications for the exchange rate, inflation and monetary policy,.