The current account posted a surplus ($334 million for June 23) for the fourth consecutive month – the 2HFY23 surplus stood at $1.1 billion – the highest surplus in almost 20 years (since 1HFY04). However, in 2004 the economy was growing with a surplus, while in 2023 the surplus is coming at the cost of economic contraction and falling employment. The fiscal year (FY23) current account deficit stood at $2.6 billion (0.7% of GDP) which is the lowest deficit since FY11 – even better than the COVID year (FY21).

The prime reason for the current account reduction is import restriction. Last year, SBP and the finance ministry adopted an unorthodox policy of import compression right from the start of the fiscal year 2023, which has now ended officially in July 2023. Imports stood at $51.2 billion in FY23- down by 27 percent. However, the externality of the import’s compression policy had an adverse impact on the export value chain (down by 14% to $27.9 bn), and official remittances inflows (down by 14% to $27.0 bn).

Then the payments of dividends of foreign shareholders of domestic companies, royalty payments, airline payments, and other outflows are also pending. Some of these pending payments are already being reflected in the current account – such as dividend payments (in primary income debit which is up by 12 percent $6.5 billion in FY23). And these unpaid dividends counter entry is booked in the FDI in the financial account – which stood at $1.5 billion in FY23 and was $1.9 billion in FY22 – a good chunk of these FDIs are pending dividend, and if these are paid in FY24, the net FDI would likely be negative.

Thus, these dividends pending payment do not understate the current account, but once paid would be reflected in the overall balance of payment. However, the other pending payments -such as royalties and airline payments are understating imports of services (down by 38% to $8.0 bn in FY23).

The imports (based on PBS data) are down by 30 percent to $55.6 billion. This is partially due to import restrictions and partially due to demand destruction. Imports (barring petroleum and food) are down by 38 percent to $29.8 billion while food imports are down by a mere 1 percent to $8.9 billion and petroleum imports are down by 27 percent to $17 billion.

The food imports have largely remained stable, while there would be some increase in quantity as overall commodity prices have softened a bit in FY23 versus those in FY22. In the case of petroleum, the decline is due to overall import restrictions, which have impacted the manufacturing value chain and then the price increase has dented the retail demand too. Then the global prices softened too. And in the remaining items, import restriction is reflected in the fall in imports. However, demand suppression has a role to play and now with imports likely to open, the overall number remains manageable.

In the case of exports, as per PBS data, the goods number is down by 13 percent, and the decline in textile exports is 15 percent. That is not a good omen. One of the reasons for low exports is the demand factor from importers in various types of textile items Pakistan exports. The demand has started picking up, lately. However, now the issues of competitiveness in energy and borrowing costs are hurting textile players. Thus, textile export growth may remain below potential.

The key is to look at the remittances which fell by 14 percent or $4.2 billion in FY23. A good chunk of that is moving to the informal sector – partially to finance informal imports and partially to dollarization (inside Pakistan) and wealth transfer (outside Pakistan). The latter is due to dampening sentiments about the economy. And the next year, the current account balance would largely depend upon the remittances recovery, if any.