The current account posted the lowest deficit in thirteen years in FY24. The toll could have been a surplus if the primary income deficit had not been too high. This was due to the clearing of the backlog of dividend and profit repatriation payments, and higher interest servicing (due to higher global rates) on public and private external debt and liabilities. Excluding the primary income deficit, the current account surplus stood at $8 billion, the highest in the country’s history. Additionally, there were some unusual gains in agricultural exports (mainly in rice), which may not be sustainable. The good news is that services exports continue to grow (though still small), and informal remittances are channeling back to the banking system as the demand for hundi hawala decreases.
Goods imports remained suppressed; in the first half of the year, imports were restricted by the SBP, and in the second half, the demand was low enough to eliminate the need for import restrictions. There has been some pickup in demand for certain segments, such as mobile phones and foreign travel. However, the imposition of additional taxes on both sectors may reduce demand in FY25.
The current account posted a deficit of $681 million (0.2% of GDP) in FY25, down from $3.3 billion (1% of GDP) in FY24. This is the lowest deficit since FY11, even better than the COVID-affected year.
Goods imports stood at $53.1 billion, almost at the same level as the previous year, but down by one-fourth from the peak in FY23. The demand suppression is evident, with the lowest sales in almost a decade (or more) in certain items like automobiles. White goods, cement, steel, and many other items also saw slowdowns, reflected in lower imports.
Food imports did not fall much. Machinery imports picked up a bit in FY24 compared to the previous year as some backlog cleared after lifting import restrictions, and mobile phone imports normalized to pre-restriction levels. Transport imports are marginally higher than the previous year but still less than half from their peak in FY22.
Goods exports stood at $31.1 billion, 12 percent higher than in FY23, and the second highest in history after $32.5 billion in FY22. The gain this year is due to higher food exports, up by 50 percent to $7.1 billion, the highest ever. The biggest gainer is rice, with exports up by 75 percent to $3.7 billion, second only to knitwear in sub-categories. However, the rice boom may fade as India is likely to return to the export market in FY25. It remains to be seen how much market share our exporters can retain, as they are unhappy with the imposition of normal income tax in FY25.
Textile exports are marginally down by 2 percent to $16.3 billion, down by 12 percent from their peak. Textile exporters are not very optimistic about FY25 due to the new tax regime. The story is similar for other manufacturing exports. Rising energy prices, high interest rates, and taxes are making the export outlook less favorable.
Services exports are up by 2 percent to a new peak of $7.8 billion, with growth expected to continue in the coming years. However, last year’s services imports went up by 12 percent to $10.1 billion, still 21 percent below the peak in FY22. Recently, there has been an uptick, with a 23 percent increase to $1.1 billion in June 2024. The detailed breakdown is yet to be uploaded, but the increase is feared to be due to higher travel expenses.
The overall trade and services deficit is down by 6 percent to $24.4 billion.
The significant increase is in the primary income balance, which is 50 percent higher than last year, standing at $8.6 billion. The increase is primarily due to the primary income debit, which stood at $9.6 billion, 50 percent higher than the previous peak. This additional $3 billion expense is significant. Part of the increase is due to the clearing of the backlog of dividend and profit repatriation, effectively paying for two years in FY24. The other element is higher external debt interest servicing costs, which ballooned due to high global interest rates.
Home remittances, which went down from the peak of $31.3 billion in FY22 to $27.3 billion in FY23, have returned to over $30 billion in FY24. The decline in FY23 was due to capital flight and routing of many imported item payments through grey channels. After the crackdown in October 2023 and better local market sentiments, the demand for capital flight has slowed down, and imports are finding legitimate payment methods. This has helped inward home remittances reach $30.2 billion in FY24.
Going forward, growth in exports and remittances is crucial for reviving growth, as the current account must be kept in balance to avoid disturbing the fragile external balance. Without this balance, economic growth cannot be achieved, as no one in the world is willing to finance our import-led growth anymore.
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