Pakistan’s balance of the current account failed to stay in surplus for the second successive month, hitting a six-month high deficit of $269 million in the wake of a month-on-month increase in the import of goods and services in January 2024.
Besides, foreign investors – mainly China – aggressively pulled out investments from some power projects running in Pakistan, resulting in an outflow of Foreign Direct Investment (FDI) by a notable $173 million in January 2024, interrupting a long spree of recording inflows in each month during the past two years. Moreover, such a large outflow in a month is seen after a gap of over five years.
According to the State Bank of Pakistan’s (SBP) revised number, the current account recorded a surplus of $404 million in December 2023.
The current account deficit surged to $269 million in January 2024 compared to $167 million in the same month of the last year, rising by 61% in the month under review on a year-on-year basis.
Cumulatively in the first seven months (Jul-Jan) of the current fiscal year 2023-24, the current account deficit shrank 71% to $1.09 billion compared to $3.79 billion in the same period of the last year.
While talking to The Express Tribune, Optimus Capital Management’s Head of Research, Maaz Azam, said though the balance of the current account has shifted into a deficit in January from a surplus in the prior month, “However, it ($269 million) is not a large deficit. Rather, it is moderate and affordable.”
He said a 10% increase in imports to $4.51 billion in January compared to $4.10 billion in December 2023 played a pivotal role in contracting the balance of the current account.
The current account deficit aggregated with a 4% drop in exports of goods to $2.69 billion in the month compared to $2.79 billion in the previous month. And less than a 1% uptick in inflows of workers’ remittances to $2.39 billion in January compared to the previous month.
He said the increase in import is driven by the necessity for urea amid a shortage in the local markets, higher LNG imports in response to increased demand during the winter season. Additionally, the food sector experienced an uptick, primarily attributed to a 24% month-on-month surge in palm oil imports and a 47% month-on-month surge in imports of other food items.
He anticipated the current account deficit would remain near and around January 2024 level in the remaining five months of FY24 amid high inflation reading and almost no demand for goods in the local markets or it may slightly increase if the government liberalises imports to let the economic activities enhance.
Read PM directs steps to attract FDI
SBP stuck to its original forecast for achieving moderate economic growth in the range of 2-3% in FY23 compared to a negligible contraction in FY23.
He said the current account deficit stood at 0.3% of GDP ($1.09 billion) in seven months, agreeing with the central bank’s forecast for the full-year deficit to come in the range of 0.5% to 1.5% of GDP ($1.7 billion to $5.2 billion).
He said the immediate challenge to the nation is to sail out from political upheaval through forming a government and then going to the International Monetary Fund (IMF) to secure a larger and longer-tenure loan programme in March-April 2024 to ensure repaying foreign debt on time and liberalising economic growth to create the required job opportunities.
In a report titled ‘Pakistan’s election outcome highlights risks to new IMF deal’, Fitch Ratings said on Monday the close outcome of Pakistan’s election and resulting near-term political uncertainty may complicate the country’s efforts to secure a financing agreement with the IMF, to succeed the Stand-By Arrangement (SBA) expiring in March 2024. A new deal is key to the country’s credit profile, and “we assume one will be achieved within a few months, but an extended negotiation or failure to secure it would increase external liquidity stress and raise the probability of default.”
FDIs down
Topline Securities reported that Pakistan recorded a net FDI outflow of $173 million in January 2024 after a period of around two years.
Country-wise major outflow was witnessed from China ($225 million) and sector-wise major outflow witnessed in the power sector ($243 million) in January 2024.
China has apparently pulled out some investment after its power dues remain pending, and foreign companies operating in Pakistan witnessed a slowdown in the repatriation of profit to their headquarters in foreign countries in December 2023.
Cumulatively in the first seven months of FY24, net FDI inflow is down by 21% to $689 million compared to an inflow of $877 million in the same period of the last fiscal year.
Published in The Express Tribune, February 20th, 2024.
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