There has been celebration about the surplus of USD 944 million from July to November 2024 in the current account (C/A) of the balance of payments.
Consequently, there is an overall surplus in the current account from July to November 2024. This stands sharply in contrast to a cumulative current account of deficit in the first five months of 2023-24 of USD 1,676 million. In effect, there has been a big improvement of USD 2,620 million in the current account of the balance of payments of Pakistan.
However, when we look at the overall foreign balance of payments position there has been only a minor improvement of USD 273 million from USD 1,527 million in July to November 2023 to USD 1,800 million in the corresponding months of 2024.
This is due to a big decline in the surplus of the financial account of the balance of payments. During these five months, it has fallen by USD 2,316 million. It was USD 3,598 million in the first five months of 2023-24 and declined substantially to USD 1,282 million in the first five months of 2024-25.
Therefore, we see an imbalanced nature of changes in the external balance of payments of Pakistan. The current account has gone into a surplus after a long time but this has been accompanied by a substantial deterioration in the financial account.
The resulting improvement is almost the same in the foreign exchange reserves of close to USD 2.6 billion. If there had been no decline in the financial account reserves would have gone up by almost USD 4.9 billion and approached USD 14.5 billion, almost adequate to provide three months’ import cover.
There is a need also to recognise that even within the current account of the balance of payments there are contrasting movements. There has been a worsening in the trade deficit in goods and services of 7.3 percent, due to faster growth in imports of 8.4 percent versus 7.4 percent increase in exports.
Fortunately, there has been spectacular growth in workers’ remittances of an unprecedented 33.6 percent, equivalent to a large absolute increase of USD 3,714 million in only five months. This is, of course, due largely to the end of a gap in the exchange rate of the rupee in the official and in the hundi markets.
Hopefully, this buoyancy in remittances will persist even through the world economy is in a mild recession and countries from where remittances come may not be in a state of buoyant growth.
Turning to the financial account of the balance of payments, the deterioration in this account is due primarily to two factors in the presence of a smaller positive development. The latter is the upsurge in the inflow in the foreign direct and portfolio investment combined from USD 859 million to USD 1,263 million. However, the level is still very low in relation to the expectations of the SIFC.
Within the two negative developments, the first is the net inflow of loans into the Government account. According to the SBP, disbursement from July to November 2024 was USD 2,097 million. This is 38.4 percent lower than the magnitude of USD 3,404 million in the corresponding period of 2023-24. The amortisation payments have been only 9 percent higher.
Overall, there is actually a negative net inflow into the government account of USD 478 million, as compared to a positive USD 1,048 million last year. Similarly, there has been a big fall in inflows to the SBP, commercial banks and the private sector. It was USD 1,691 million in July to November 2023 and has fallen to only USD 497 million in the first five months of 2024.
Clearly, rather than being carried away by the emergence of a surplus in the current account of the balance of payments there is the growing apprehension about the overall drying up of inflows into the financial account from USD 3,598 million to USD 1,282 million in the first five months of 2024-25.
There is the dire concern that if this deterioration in the financial account persists, then Pakistan will fall way short of meeting its external financing requirements. This will lead eventually to a process of falling foreign exchange reserves. The annual external financing requirements for 2024-25 have been estimated by the Ministry of Economic Affairs at USD 19,393 million.
This includes the rollover of time deposits of USD 3 billion by the Kingdom of Saudi Arabia and USD 4 billion of SAFE China deposits. Therefore, the new inflows are expected to be USD 12,393 million.
According to the monthly statement by the Ministry for the period, July to October 2024, the monthly inflow in October was only USD 415 million in October. Cumulatively, in the first four months the inflow has been USD 1,723 million, equivalent to only 14 percent of the annual target of new inflows.
There appears to be a big problem with inflows from all types of creditors. The first four months of 2024-25 have seen only an inflow of USD 980 million from bilaterals and multilateral agencies. This is equivalent to only 19 percent of the annual target.
Similarly, the target is flotation of USD 1000 million of Euro/Sukuk bonds which is yet to take place. Private creditors are expected to extend loans of USD 3,779 million. As of end-October, only USD 200 million has been received, which may have increased somewhat in the last four weeks.
Overall, if the shortfall in external financing persists and grows rapidly then at the time of the IMF review in March there may be serious concerns manifested by the IMF Staff Mission of the financial viability of the IMF Extended Fund Facility.
Pakistan may be asked to seek reprofiling of loans from major creditors like China and international commercial banks. Coupled with the likely failure to meet a number of quantitative performance criteria, indicative targets and structural benchmarks, the future of the IMF programme may be in jeopardy. This will lead to a quantum jump in risk perceptions of the economy of Pakistan. We hope that such a situation will be avoided.
Copyright Business Recorder, 2024