The first half of the fiscal year presented a favorable macroeconomic picture, primarily due to falling inflation and a positive balance of payments. A key highlight was the posting of a current account surplus of $1.2 billion in 1HFY25, compared to a deficit of $1.4 billion during the same period last year. This, coupled with positive capital and financial accounts, enabled the SBP to increase its foreign exchange reserves by $2.3 billion to $11.7 billion, covering nearly three months of imports at the current low demand.
The challenge, however, lies in financing growing imports once economic growth gains momentum, which is likely to occur within the next six months.
Goods imports rose by 9 percent in 1HFY25, reaching $27.7 billion, while goods exports grew by a relatively modest 7 percent to $16.2 billion. As a result, the trade deficit in goods worsened by 13 percent to $11.5 billion. The services trade balance followed a similar trend, with imports growing faster than exports, leading to a 17 percent increase in the deficit, which now stands at $1.6 billion.
Overall, the combined goods and services trade deficit widened by 13 percent to $13.1 billion, while the primary income balance fell by 11 percent to $4.5 billion. Despite the ongoing economic slowdown, deficits have continued to grow.
The silver lining has been the robust performance of home remittances, which not only financed the incremental deficit but also resulted in a surplus. Home remittances grew by an impressive 33 percent to $13.4 billion, serving as a critical lifeline.
Within the 9 percent growth in goods imports, the largest increases were in machinery (up 33 percent to $4.0 billion) and textiles (up 53 percent to $2.6 billion). Restrictions on machinery imports during most of FY23 and part of FY24 have now been lifted, clearing the backlog. In textiles, the increase is largely due to higher raw cotton imports, driven by a poor domestic crop, as well as other textile-related items. In some cases, large exporters prefer importing raw materials rather than sourcing locally to avoid delays in tax refunds.
There has been a marginal decline in food and petroleum imports, mainly due to falling global commodity prices, which has helped lower the import bill. Additionally, smuggling from Iran has diverted some petroleum imports. However, the recent surge in international oil prices and efforts to curb smuggling could lead to higher petroleum imports.
On the export front, growth was driven by the food and textile sectors. In food, rice exports showed signs of tapering off and are expected to decline slightly in the second half of the year. In textiles, growth was led by value-added sectors, with garments and knitwear posting double-digit growth, while yarn exports contracted.
The standout export performer was the technology sector, which grew by 28 percent to $1.8 billion in 1HFY25. Confidence among IT companies in the PKR is returning, leading to business expansion. The SBP’s relaxation of export retention limits has further incentivized businesses to repatriate revenue to Pakistan. Sustaining this trend is crucial, as future growth momentum will heavily depend on services exports.
Home remittances remained the top contributor to the current account surplus. The decline in informal Hundi/Hawala transactions has maximized flows through formal channels. Additionally, freelancer income is growing and contributing positively to this head. There may also be instances of individuals repatriating funds. Whatever the reasons, this growth is highly welcome.
In the financial and capital accounts, the first half also showed a net positive position. While FDI is increasing, it remains far below its potential. The recent rise in the U.S. dollar index has triggered some outflows from foreign holdings in GoP securities. If this trend continues, maintaining a balance of payments surplus could become a challenge. This underscores the need for a cautious approach to monetary policy easing to manage both current account and capital and financial account deficits.
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