KARACHI: Pakistan’s current account deficit (CAD) narrowed by over 78 per cent in the first month of FY25, which is a positive sign for the economy.
On Monday, the State Bank of Pakistan (SBP) reported that the country posted a CAD of $162 million in July against $741m in the same period last year. This sharp contraction reflects the improved situation thanks to an 188pc decline in the trade deficit. The CAD was $313m in June, the last month of FY24.
The CAD was higher during the first half of FY24 before starting to narrow in the second half, closing the year at a little over half a billion dollars.
Despite the challenging situation in FY24 regarding the foreign exchange reserves, the State Bank and the government were bent on restricting imports to minimise the trade and current account imbalances.
Foreign investment surges 64pc
The CAD was just $665 million in FY24 compared to a deficit of $3.275bn in the preceding fiscal year. However, the CAD in July is a sign of improvement, and the current account could be surplus in FY25, provided the economic situation remains the same.
The SBP data shows that exports of goods increased in July to $2.391bn compared to $2.118 in the last fiscal year. The export of services also showed some improvement as it reached $622m against $588m.
Imports of goods and services witnessed a mixed trend in July. The goods’ arrivals rose to $4.689bn compared to $4.142bn in July last year. The import of services declined to $761m against $849m.
The overall exports in July were $3.013bn against imports of $5.470bn, reflecting a trade gap of $2.457bn in July.
Some economists believe the CAD could rise this year since the government would have to follow the ‘no restrictions’ policy. Pakistan is willing to finalise a new $7bn Extended Fund Facility, while the International Monetary Fund has attached some strings for approving the bailout, including free imports.
Recently, SBP Governor Jameel Ahmed said there had been no curbs on imports.
However, bankers and importers did not endorse this claim. A senior banker and currency expert said the central bank was still influencing the exchange rate and there was no free corridor for the importers to open letters of credit. They were not free to import whatever they wanted to. Importers say a selective import policy was still in place with some relaxations.
The imports in FY24 totalled $53.166bn compared to $52.695bn in FY23, a slight rise of $471m.
China, HK lead FDI inflows
On the other hand, foreign direct investment (FDI) surged by 64 per cent in July. However, it recorded a 19pc decline month-on-month.
The SBP reported that the FDI increased by $53 million to $136.3m in July against $83.2m in the corresponding period last year. The percentage increase is significant, but the amount was too small compared to the inflows in the regional countries.
Furthermore, the rise in July was primarily because of higher inflows from China and Hong Kong, indicating other countries were less interested in investing in Pakistan.
The FDI inflows slightly improved to $1.9bn in FY24 from $1.6bn in FY23.
The FDI uptick is limited to a few countries and select sectors. The inflows from China were dominating, reaching $45.1m in July against $21.2m last year.
The inflow from Hong Kong was the second highest as it reached $42.4m against $29.2m in July 2023. Also, the inflows from the United Kingdom and the US grew to $22m and $13.2m, respectively.
The power sector attracted the highest FDI of $62m against $50.2m in the same month last year. The oil and gas exploration sector received $30m against $17m last year.
Similarly, the financial business sector could attract $20.4m compared to just $4.6m in July 2023.
Published in Dawn, August 20th, 2024
