Unusual balance of payments

The data on the balance of payments in the first four months of 2023-24 has been released recently by the SBP (State Bank of Pakistan). There are both positive and negative aspects in the numbers which are discussed below.

We first look at the numbers for the last month, October. It is unusual that the balances in the current and financial accounts of the balance of payments for the month are both negative. The corresponding numbers for October 2022 show a negative balance in the current account but a positive balance in the financial account.

Fortunately, the size of the current account deficit in October this year is very small at $74 million, as compared to a relatively large deficit of $849 million in October 2022. However, this was more than fully financed by a big financial account surplus of $1173 million.

As opposed to this, in October 2023 along with the current account deficit, there is simultaneously a financial account deficit of $75 million. Consequently, there was a significant fall in foreign exchange reserves of $172 million.

There has been an expression of satisfaction at the Government level with the massive containment in the current account deficit of 91.3% in October 2023, in relation to the level in October 2022. This is primarily the result of an increase of 21% in exports of goods and a decline in imports of 6.6%.

However, there is an unusually large divergence in the estimates of imports by the PBS (Pakistan Bureau of Statistics) and the SBP respectively in October. The latter estimate is lower by $518 million, equivalent to almost 11%.

Between July and September, the SBP estimate was lower by only 1.7%. Presumably, if the SBP import estimate diverges less from the PBS estimate after a second round of verification, then the current account deficit could be significantly larger.

There is one very worrying development in October. Total disbursements of assistance into the Government account are only $225 million. This is less by as much as 88% in comparison to the amount received in October 2022. Also, there has been a decline in October of 10% in foreign investment.

Further, there has been curtailment in the outflow of debt amortization by 23.3%. Despite this, the drying up of external inflows is amply demonstrated by the net outflow of $252 million from the Government account. As compared to this, there was a large net inflow into the Government account in October 2022 of $1253 million.

Overall, there has been a decline in foreign exchange reserves in October of $172 million. The reserves were $7.4 billion at the end of the month. This is already $1.6 billion below the level of $9 billion set as the target in the IMF Stand-by Facility.

Turning to the balance of payments picture over the four-month period, July to October, it looks better this year. The primary reason for this is the disbursement of $4 billion during this period, mostly after the commencement in July of the IMF Stand-by Facility. This led to the receipt of the first installment from the IMF of $1.2 billion and deposits of $2 billion from Saudi Arabia.

However, the receipt of funding from external sources after mid-July has been only $0.8 billion. Pakistan needs another $15 billion of disbursements from November 2023 to June 2024. This looks very unlikely given the observed ebb in inflows in October.

The good news is the substantial reduction in the trade deficit in goods over the four-month period. This is entirely due to the curtailment in imports by $4.2 billion. As highlighted above imports have also fallen in October despite the decline in the value of the US$ with respect to the Rupee. Is SBP skillfully continuing to exercise control over the volume of imports?

The worrying outcome in the four-month period is the precipitate decline in the level of workers’ remittances by almost 14%. Fortunately, there has been some recovery in the inflow by almost 10% in October. Hopefully, this will continue with the narrowing down of the difference between the open market and the inter-bank exchange rate.

The period, July to October, has also witnessed an increase in the deficit in primary income by a sizeable 62%. Last year the repatriation of profits by multinational companies was severely restricted by the SBP. It has now increased by over 266% in the first four-months. This should send a more positive signal to potential foreign investors. Further, there has probably been a big increase in interest payments on external debt.

Overall, there are both positive and negative developments on the balance of payments front in the first four months of 2023-24, although the October figures are more on the negative side. The big risk factors in the coming months are, first, the level of imports in the presence of limited depreciation of the rupee and the negative impact of rising domestic energy costs on exports.

Second, there has been a quantum decline in the disbursements into the Government account after July 2023. The ebb in inflows could put a lot of pressure in coming months on the level of foreign exchange reserves of the SBP. The IMF Stand-by facility does not appear to have reduced negative perceptions of lending to Pakistan.

Copyright Business Recorder, 2023