In August, the current account posted a marginal surplus of $75 million. The deficit for the July-August period stood at $171 million, which is 81 percent lower than the same period last year. With commodity prices softening and domestic demand not picking up as expected, the current account is likely to post a surplus in FY25. The narrative suggests that foreign exchange reserves will continue to build, although higher economic growth may remain elusive.
The trade deficit in goods and services amounted to $5.14 billion in July-August FY25, a 19 percent increase compared to the same period last year. The primary income balance tells a similar story, with the deficit for the first two months of FY25 being 33 percent higher year-over-year. Overall, the combined trade and primary deficits were $ 1.14 billion higher in the first two months of this fiscal year.
Despite this, the current account deficit still shrank by $722 million during the same period, largely due to the impressive performance of home remittances. These increased by 44 percent, or $1.81 billion, reaching $ 5.94 billion for the July-August period. Remittances have returned to the $3 billion per month mark, thanks to more people going abroad and, more importantly, tighter controls on the currency grey market and a reduction in demand for money being sent abroad. This improvement reflects the benefits of achieving macroeconomic stability.
Looking ahead, if remittances continue at this pace, the current account will be in a much better shape for the remainder of the year. The import bill is also expected to decrease due to falling oil and commodity prices. Brent oil is down 45 percent from its peak in 2022, and palm oil has dropped nearly by half. These two items have the largest share of commodity imports, and their soaring prices previously exerted immense pressure on the current account and the currency in FY22.
Now, the global commodity supercycle, which began in the aftermath of COVID and the Ukraine conflict, seems to be winding down, with prices falling due to inertia. This year is expected to see continued easing of global commodity prices, as demand remains subdued due to global monetary tightening, which is dragging prices down.
In August 2024, imports (according to PBS data) totaled $8.75 billion, a 7 percent increase compared to the same period last year. The growth is primarily driven by the petroleum group, which surged 23 percent to $2.67 billion, while machinery imports grew by 15 percent. On the other hand, food imports declined by 18 percent to $1.07 billion.
As for exports (PBS data), they rose 14 percent to $ 5.07 billion in July-August FY25. The food group performed particularly well, increasing by 42 percent to $1.01 billion, while textile exports also saw modest growth, inching up by 5 percent to $ 2.92 billion. In August, textile exports reached $1.64 billion, the highest point in 26 months. This is noteworthy given that rising energy costs and higher income taxes have been challenging for textile companies. As one of the country’s largest textile exporters lamented, “we have orders, but we’re fulfilling them at a loss.” It remains to be seen how long the sector can maintain this strong export performance.
The overall trade balance of goods (PBS data) stood at $3.68 billion, down by 1 percent year-over-year. Interestingly, the trade deficit based on SBP data was $4.67 billion, which is 26 percent higher than the PBS figure. This marks the second consecutive month where the SBP trade deficit exceeds PBS figures, which is unusual, as SBP data generally reflects lower imports due to freight charges being counted under services. SBP data is based on payments, whereas PBS data is based on actual trade activity.
The higher imports and trade deficit in SBP data suggest that some pending payments are being cleared, temporarily inflating SBP imports. Without this backlog, the current account would likely be in surplus. Once these payments are processed, the current account may indeed turn positive.
In terms of services, exports continue to grow. Technology imports rose by 27 percent in August to $298 million, surpassing the 12-month average of $275 million. This growth is encouraging, reflecting the expanding potential of IT companies, which are repatriating more funds due to improved macroeconomic stability.
The remittances story parallels that of the IT sector, with freelance export proceeds also contributing significantly. Remittances are now reaching a monthly run rate of $3 billion, and unlike in the past, expat money is no longer heavily invested in real estate. Instead, these inflows appear to be driven by genuine remittances, possibly with real estate investment being replaced by freelancers’ income. This shift is positive and will help keep the current account in surplus, which is crucial for boosting foreign exchange reserves.