The current account posted a deficit of $270 million in May 2024 after three straight months of surplus. The deficit is mainly due to a higher primary income deficit where the debit is almost a billion dollars higher than the monthly average in the first ten months. This is due to the substantial clearing of the backlog in dividend and profit repatriation of foreign shareholders. The number is in line with what the SBP told the analysts’ community in the last post-monetary policy briefing.
Had the backlog not been cleared, the current account could have shown a surplus of around $600 million in May. The overall deficit in 11FY24 stands at $464 million and the full-year deficit is likely to remain within $1 billion – much less than SBP’s earlier projection of 0.5 to 1.5 percent of GDP.
In May, all the key numbers (imports, exports, and remittances) were at a relatively higher side. Goods imports stood at $5.0 billion – the highest since August 22 while the goods exports came at $3.0 billion – the highest since June 22. The inward home remittances were at a record $3.2. This has enabled SBP to clear some pending payments, which is one of the core conditions of the to-be IMF program.
The goods imports crossed $5 billion after many months and the increase is almost across all the sectors, suggesting a slight improvement in the demand. In the summer months, energy-related imports are usually higher due to peak electricity demand season. The imports are up 13 percent month-on-month and 35 percent year-on-year on May 24, and the 11MFY24 imports are down by 2 percent to $48.2 billion.
Goods export proceeds are up by 14 percent month-on-month and the 11MFY24 toll stood at $28.7 billion – up by 11 percent. There is a slight decline on a monthly basis in food exports perhaps because the one-time bonanza of rice export growth is waning as India is coming back to exporting market. In May, the textile exports were up by 14 percent month-on-month.
The overall trade deficit of goods is down by 17 percent to $19.7 billion in 11MFY24 – thanks to an overall demand slowdown.
The good news is that the IT exports keep growing and have reached a record level of $332 million in May 24. Overall export of services growth was relatively less at 2 percent, touching $7.1 billion in 11FY24. On the other hand, the import of services was up by 17 percent to $9.3 billion in 11MFY24, which is due to growing travel-related costs - much higher than year.
The services trade deficit is up by 137 percent to $2.1 billion in 11MFY25 and the overall goods and services trade deficit is down by 11 percent to $21.8 billion.
The gain from lowering the trade deficit is partially eaten up by a record-high primary income deficit – up 48 percent (or $2.4 bn) to $7.5 billion. This is due to higher primary income debit which in May alone stood at $1.5 billion, as SBP was rightly busy clearing the pending dividend payments. Then the high global interest rates have pushed up the debt servicing cost too.
The story of remittances is getting better lately as it reached an all-time high level of $3.2 billion May 24. The last two years were generally not good for remittances as the chunk was moving to the grey market where the pressure of outflows (people sending savings abroad through the hundi/hawala market) kept the formal inflows low. Now with stability in sight and a crackdown on the informal market, finally marginal remittances flows are moving to the formal market. One of the other reasons for high flows on May 24 is Eid-related spending as the flows usually peak near Bakra Eid.
The current account is likely to remain close to zero in the next fiscal year as the economy cannot afford to have higher imports while export and remittances growth is likely to remain slow. That is going to keep GDP growth in check, and SBP might be extra careful in monetary easing to not let stability vanish due to growing imports. One other way to keep imports in check is currency adjustment where 5-7 percent depreciation cannot be ruled out before the signing of the Fund program.
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