H1FY24: Contained CAD, better inflows help improve external account

KARACHI: Pakistan’s external account improved in the first half of FY24, as current account deficit (CAD) remained well contained and financial inflows increased after successful negotiation of Stand-By-Arrangement (SBA) with the International Monetary Fund (IMF) in June 2023, the State of Pakistan’s Economy Report for the first half of FY24 released on Tuesday by the State Bank of Pakistan (SBP) said.

As a result, gross SBP reserves rose to $ 8.2 billion at end-December 2023, up from $4.4 billion in June 2023, the report said adding this had positive spillovers on sentiments in foreign exchange market, which was reflected in QoQ exchange rate appreciation in the second quarter of FY24.

The report said that a considerable narrowing of CAD was mainly on account of improved trade balance, as imports declined while exports grew over the last year.

During the first half of FY24, the country managed to arrange sufficient financial inflows to meet external debt obligations. Financial account recorded a net inflow of $4.5 billion during the first half of FY24 against net outflow of $ 0.6 billion last year. These largely consisted of official inflows, disbursements under the IMF’s SBA, as well as, bilateral and multilateral flows, the report said.

Similarly, the FDI inflows, mainly concentrated in non-exporting sectors, are burdening current account via higher profit/ dividend repatriation. This underpins the need to encourage FDI into export-oriented sectors, which would not only bring much-needed foreign exchange to further strengthen debt servicing capacity, but will also aid in improving the country’s production capability through associated technology transfer.

Current Account Deficit narrowed to $0.9 billion during the first half of FY24, around 76 percent lower compared to $3.8 billion in the corresponding period of last year.

A sizeable reduction in the trade deficit during the first half of FY24, which outweighed the increase in interest payments and profit/ dividend repatriation, mainly explains this improvement.

Both import contraction and recovery in exports have contributed to narrowing of the trade deficit. Decline in imports by 14.6 percent, despite removal of import prioritisation measures, reflects tepid domestic demand and lower international commodity prices. On the other hand, exports grew by 7.4 percent during the first half of FY24, supported by increased production and higher export prices of agro-food items.

Services trade deficit increased to US$ 1.2 billion in H1-FY24 compared to US$ 0.3 billion in the same period last year. The increase was on account of both increase services import and a slight decrease in services export (Table 5.2). The increase in services imports was mainly driven by payments related to transport and travel.

Workers’ remittances during the first half of FY24 were recorded at $13.4 billion, down by 6.8 percent as compared to the same period in FY23. Importantly, inflows from all major corridors (the US, UK and GCC) declined except for EU.

Copyright Business Recorder, 2024