Vulnerable balance of payments

The figures of the external balance of payments of Pakistan have been released recently by the SBP for February 2025 and for the first eight months of 2024-25.

There has been a positive declaration of the success in generating a surplus in the current account of the balance of payments. However, an overall focus on transactions, especially in the financial account, does not reveal such a strong position and, in fact, highlights some increasing vulnerability.

The objectives of this article are, first, to highlight the factors which have contributed to a surplus in the current account. Second, there is need to identify why despite the surplus, foreign exchange reserves have declined somewhat since December 2024. This will require an analysis of recent developments in the financial account of the balance of payments.

The cumulative current account surplus over the period, July to February, 2024-25, is $691 million in comparison to a deficit of $1,730 million in the corresponding period of 2023-24. This is in sharp contrast to the actual simultaneous occurrence of a larger deficit in the balance of trade in goods and services.

This trade deficit has risen to $18,753 million during 2024-25. It is higher by almost $3 billion, equivalent thereby to an increase of almost 19%. The question then is how has a surplus been generated in the current account? The answer lies in the phenomenal growth in remittances of $5,885 million with an unprecedented rate of increase of 32%.

An examination of the individual country sources of remittances reveals that they have been exceptionally high mostly from the Middle East countries. The eight-month growth rate in remittances from Saudi Arabia has been 34%, 54% from the UAE and 24% from other countries in the region.

Clearly, in the presence of low oil prices it is unlikely that incomes have gone up to facilitate much bigger remittances. Apparently, the SBP has been engaged in buying technically from the foreign exchange market in the country. Effectively, operations in the hundi market have been limited. It would be useful to know the premium that the SBP gives on market purchases.

The growth rate of remittances of 32% in the first eight months is the primary cause of success in generating a surplus in the current account, despite significantly larger trade deficit in goods and services and 13% growth in the primary income outflows.

The need for a sustainable improvement in the balance of payments and reserves’ position require a fast growth of exports. The Uraan Plan targets for a doubling of exports in under five years. This will require a double-digit growth rate.

However, the growth rate in exports of goods and services from July to February, 2024-25, has been under 7%. In fact, in February there has actually been a decline of over 14%.

Turning to the financial account of the balance of payments, there is little good news. The surplus has declined by $4,153 million, equivalent to a very big drop of over 91%.

Clearly, the umbrella of the three-year Extend Fund Facility of the IMF since October 2024 has not provided the risk cover to external sources of lending and foreign direct investment. Despite a booming stock market in Pakistan, external portfolio investment has fallen and there has actually been a withdrawal of $197 million of funds.

The perhaps biggest concern is that there has been a net outflow from the Government account between July 24 and February 25. Disbursement of loans has aggregated to $3,594 million as compared $5,394 million last year, when Pakistan had the IMF Stand-by facility.

The net inflow is, in fact, negative at $253 million. This is because of amortization payments of $3,847 million. Similarly, the other sector amortization has been higher than disbursements by $624 million.

There is the likelihood that the recent IMF Staff Mission to Pakistan to conduct the first review of the Programme may have expressed concern about the decline in the flow of funds into Pakistan. This is likely especially of loans from countries, multilaterals and private entities, like international commercial banks, and flotation of bonds.

Total disbursement into the Government account has been projected at $8,155 million in 2024-25 in the IMF Staff Report, at the start of the Extended Fund Facility. The actual inflow in the first eight months of 2024-25 has been only $3,594 million, equivalent to 44% of the annual target.

The consequence has been that foreign exchange reserves have been declining since December 2024. The decline is of $467 million. The foreign exchange reserves were also short of the target for December 2024 in the quantitative performance criteria for the first Programme review.

The magnitude in the target for foreign exchange reserves was $12,050 million as of December 2024. The actual magnitude was $11,731 million, implying a shortfall of $319 million. They have fallen further by $634 million from the end of December 2024 to the 7th of February 2025. Despite this the rupee remains overvalued by over 4%.

The Staff Loan Agreement has not been concluded by the IMF of the first review of the EFF. We hope that there will be no undue delay, otherwise external inflows into Pakistan could be further adversely affected, due to higher risk perceptions.

The other area of uncertainty is the emerging global escalation in import tariffs, led by the USA. This could adversely impact especially on Pakistan’s exports to the USA, which currently is the largest market of the country’s exports, exceeding $5,442 million in 2023-24.

Exports are beginning anyway to falter, with a significant decline in February. There is need for development of an aggressive set of policies to promote and diversify exports to enable the achievement of the ambitious target of doubling them in the next five years.

Another risk factor is the higher incidence of big acts of terror, which could impact adversely on foreign direct investment. Overall, there is evidence of the growing vulnerability of the external balance of payments position of Pakistan.

Copyright Business Recorder, 2025