Current account surplus hits record high

Pakistan’s economy received a significant boost as the current account remained in surplus for the fourth consecutive month in June, resulting in an astounding 85% reduction in the full-year deficit to $2.56 billion for the previous fiscal year 2023. The State Bank of Pakistan (SBP) had reported a staggering current account deficit (CAD) of $17.48 billion in fiscal year 2022.

June alone witnessed a remarkable current account surplus of $334 million, contributing to a cumulative surplus of over $1.4 billion for the past four months from March to June.

Speaking to the media, Finance Minister Ishaq Dar expressed confidence in Pakistan’s economic stability, stating that the total CAD had significantly declined to $2.56 billion during FY2022-23, accounting for only 14.65% of the deficit recorded in the previous fiscal year 2021-22. He further emphasised that the country’s total reserves remained robust, with the government successfully meeting its sovereign payments, leaving the reserves at the same level as when Prime Minister Shehbaz Sharif assumed office.

Speaking to The Express Tribune, Head of Research at Ismail Iqbal Securities, Fahad Rauf, highlighted the positive surprise of the full-year CAD at $2.56 billion, surpassing the International Monetary Fund (IMF)’s revised projection of $4 billion.

Tahir Abbas, Head of Research at Arif Habib Limited, explained that the current account surplus in June 2023 had improved compared to May, primarily due to a significant reduction in the import and export of services. He also noted that June saw nominal Hajj (a Muslim ritual) payments compared to the higher amounts in May.

The combination of high international commodity prices and the conclusion of one-off imports, such as the Covid-19 vaccine, played a significant role in reducing imports during FY24, said Abbas.

The government’s strict restrictions on imports through administrative measures were instrumental in significantly cutting down the current account deficit in FY23. However, export earnings and inflows of workers’ remittances from overseas Pakistanis experienced a slowdown, making a modest contribution to the full-year CAD.

Imports of goods saw a substantial drop of 27% to $52 billion in FY2023 compared to $71.54 billion in FY22. Meanwhile, the export of goods reduced by 14% to $28 billion in FY23 compared to $32.49 billion in the previous fiscal year. Workers’ remittances also decreased by 14% to $27 billion in FY23 compared to $31.28 billion in FY22.

Looking ahead, experts anticipate a potential increase in the CAD in FY2024 due to IMF’s conditions, which require the government to reopen imports and support economic growth. The government aims for a growth rate of 3.5% for FY24, following a nominal growth rate of 0.3% in FY23.

Rauf pointed out that the IMF projected a CAD of $6.5 billion (1.8% of GDP) for FY24, close to his own research house estimate of 2% of GDP.

He also noted that the four-month winning streak of current account surplus would likely end in June, with the country recording an affordable (small) CAD in July and onwards after the government agreed to reopen imports in June 2023 to secure an IMF lifeline of $3 billion.

Abbas, however, believes that the CAD for FY24 will remain relatively low, around $4 billion, as the cash-strapped government will refrain from fully reopening imports and will keep them within available means. He emphasised that the value of imports would not exceed the cumulative value of export earnings and remittances in FY24.

He clarified that the new IMF loan of $3 billion is intended for repaying the old maturing foreign debt and improving foreign exchange reserves, rather than financing imports.

During FY23, the government controlled imports due to critically low foreign exchange reserves, mitigating the high risk of default on foreign debt repayment. However, the decline in imports led to partial closure of industries, rendering millions of people jobless and significantly impacting economic growth.

To address this issue, Rauf suggested that the government could control imports through sustainable practices, such as reducing reliance on imported fuels for power production and increasing the use of local coal to generate electricity. He also advised setting up more solar-based power projects to reduce reliance on imported fuel.

The two experts are optimistic that the domestic economy will stabilise and take off in FY24 as much-needed foreign funds become available through the acquisition of the new IMF loan programme.

However, they also cautioned against the threat posed by illegal currency markets in the country and near bordering areas, which could again lead to an imbalanced exchange rate and higher inflation in FY2024.

Published in The Express Tribune, July 19^th, 2023.

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