Trade deficit remains under control in first quarter

Pakistan's trade deficit marginally expanded to $5.4 billion in the first quarter of the current fiscal year due to a double-digit growth in exports and a constant check on imports, which helped keep foreign exchange reserves at $10.5 billion.

Exports continued their upward movement as they crossed the $2.8 billion mark in September for the first time in the past four months, according to the data released by the Pakistan Bureau of Statistics (PBS) on Wednesday.

Merchandise goods export jumped to $7.9 billion during the first quarter (July-September), higher by $974 million, or 14.1%, over the same period of last fiscal year.

The net increase in exports during the quarter was almost equal to the fresh loan tranche of $1.02 billion that Pakistan received from the International Monetary Fund (IMF) at an interest rate of around 5%.

There has been a healthy momentum in exports and remittances from overseas Pakistanis during the current fiscal year – the two most critical non-debt creating sources of foreign inflows. This provides an additional cushion of at least $600 million per month to the government, which is still sitting on thin foreign exchange reserves.

After the IMF's fresh injection, the gross official foreign exchange reserves have reached around $10.5 billion. However, they are still below the minimum threshold that can provide three months of import cover.

Imports grew nearly 10%, or $1.2 billion, in the first quarter and stood at $13.3 billion, stated the national data collecting agency.

Trade deficit widened 4.2% to $5.4 billion in the first three months of current fiscal year 2024-25, a rise of only $224 million largely because of a jump in exports.

The pace of increase in the deficit was far slower than previous years due to a relatively better performance of exports and a constant check on imports.

In the last fiscal year, rice exports had significantly contributed to Pakistan's total exports. But India has now lifted the ban on its rice exports.

Global prices for different varieties of rice have dropped this week after India and Pakistan made competing moves by abolishing price caps and resuming exports. Last week, India scrapped the ban on export of non-Basmati white rice, which came more than a year after it blocked overseas sales.

PBS data showed that the trade deficit increased one-fifth in September as it swelled to $1.8 billion over the same month of last year. Exports amounted to $2.8 billion last month, higher by $334 million, or 13.5%. Imports jumped to $4.6 billion.

There was a 2% month-on-month increase in the trade deficit that reached $1.8 billion on the back of a marginal growth in exports and imports.

Pakistan's external debt creating flows were not picking up earlier in the absence of an IMF umbrella. The global lender has now approved a $7 billion three-year programme, which should help the country maintain its foreign currency reserves in double digits.

However, the IMF has again started emphasising the requirement of currency depreciation. According to a press statement issued by the lender, its executive board directors underlined the importance of allowing the exchange rate to serve as a shock absorber, buffering competitiveness and helping rebuild reserves.

The relatively low level of imports is detrimental to the revenue targets of the Federal Board of Revenue (FBR). During the first quarter of FY25, the FBR collected Rs901 billion in taxes at the import stage. Import taxes were equal to 35% of the total taxes received during the quarter, which was less than the ratio of 40% a year ago. Before the economic crisis hit Pakistan two years ago, the tax collection at the import stage constituted more than half of the total tax receipts.

Pakistan's normal monthly import bill used to be in the range of $6 billion to $6.5 billion, which the government has later restricted below $5 billion due to the thin foreign exchange reserves.