CA turns positive on remittances

Year ends with $2.1b but June deficit raises concern; trade gap widens to $29.4b

KARACHI:

Pakistan recorded a current account surplus of $2.1 billion in the fiscal year 2025, marking a significant improvement from the $2.07 billion deficit posted in FY2024. However, the positive annual picture was marred by a current account deficit of $84 million in June 2025, reflecting renewed pressure from rising imports and weaker remittance inflows.

The turnaround was largely supported by strong growth in workers' remittances and a modest rise in exports, according to provisional data released by the State Bank of Pakistan (SBP).

Exports of goods grew by 4.2% year-on-year, reaching $32.3 billion in FY2025, compared to $31.0 billion in FY2024. Despite this growth, imports rose at a faster pace, climbing to $59.1 billion, an 11.1% year-on-year increase, leading to a wider trade deficit of $26.8 billion, up from $22.2 billion the previous year. The services sector showed moderate improvement, with services exports increasing to $8.4 billion, while services imports touched $11.0 billion, keeping the overall services trade balance in negative territory at $2.6 billion.

Among the services, Pakistan's information technology (IT) sector achieved a major milestone in FY2024-25, with exports reaching a record-breaking $3.8 billion.

The latest SBP data stated that IT and IT-enabled services (ITeS) exports surged to $3.8 billion, reflecting a $600 million year-on-year increase compared to $3.2 billion in the previous fiscal year.

Muhammad Umair Nizam, Senior Vice Chairman of the Pakistan Software Houses Association (PASHA), credited the consistent upward trend in IT exports to the sector's increasing maturity and strategic role in stabilising Pakistan's economy, particularly in contributing to a current account surplus this year.

"However, the sector could have achieved even greater results if policy support, regulatory predictability, and global economic stability had been more favourable," he said. The potential of Pakistan's IT industry is far greater. With timely and supportive government policies, we can bring in much higher volumes of foreign exchange, he said.

A major contributor to the improved current account position was the robust inflow of workers' remittances, which surged to $38.3 billion in FY25 from $30.3 billion a year earlier, an increase of 26.6%. In June alone, however, remittances fell to $3.69 billion, lower than in preceding months, reflecting potential seasonal and other effects.

On the financial account front, Pakistan continued to face challenges. The financial account recorded a net outflow of $311 million in June, reflecting subdued foreign direct investment and portfolio activity. Despite these outflows, Pakistan's foreign exchange reserves held by the SBP rose to $14.5 billion by mid-July 2025, up from $10.63 billion in June 2024, supported by inflows earlier in the year.

A troubling trend is the decline in services exports, particularly in travel-related categories. Travel services exports fell from $972 million in FY23 to $721 million in FY25, pointing to weaknesses in the tourism or business travel sectors.

On the import side, services expenditures remained elevated. Transport services imports stayed high at $4.6 billion in FY25, while financial services imports rose sharply from $518 million to $727 million, indicating a growing reliance on external financial institutions and expertise. These rising costs added to the services trade deficit, further widening the overall external gap.

The primary income balance also remains a drag, with a deficit of $8.9 billion in FY25. This was mainly due to high outflows in the form of profit repatriation by foreign investors and interest payments on external debt. Despite a strong inflow of workers' remittances, reaching $38.3 billion in FY25, there is concern over overdependence on this single source of income. A downturn in global labour markets or geopolitical shifts could expose Pakistan to sudden financial strain. Additionally, official transfers remained minimal at just $575 million, signalling limited budgetary support from foreign governments or donors.

Volatility in the financial account is another area of concern. Direct investment abroad turned negative in some quarters (e.g., -$911 million in Jul-Sep FY25), while portfolio investment flows showed considerable fluctuation, reflecting investor uncertainty. Meanwhile, other investment liabilities surged, particularly in June FY25, when net incurrence of liabilities reached $2.96 billion — likely the result of short-term borrowing or debt refinancing.

Although the SBP's foreign exchange reserves (excluding CRR/SCRR) improved to $14.6 billion by the end of FY25, the overall balance for the year was still negative at $3.7 billion. This suggests that, without continued support, reserves could come under renewed pressure.

While the current account improved to 0.51% of GDP in FY25, the broader economic picture remains mixed. Nominal GDP growth may be partially driven by debt-financed imports rather than sustainable productive expansion. High government disbursements ($9.5 billion) alongside rising amortisation costs ($7.6 billion) point to increasing debt-servicing burdens.

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