Achieving a lower current account deficit in Pakistan has historically involved reducing the trade deficit through import restrictions. However, such measures face opposition from multilateral organizations like the International Monetary Fund (IMF), citing market distortion concerns.

Pakistan’s current account showed a surplus of $619 million in March, up from $537 million in the same month last year, boosted by increased remittance inflows during Ramazan/Eid and a reduced trade deficit. While the surplus is a positive sign, it’s preferable for it to result primarily from higher foreign exchange inflows, particularly from remittances and trade, rather than from increased liabilities.

The March 2024 surplus of $619 million, a significant increase from the revised surplus of $98 million in the previous month, marks the highest monthly surplus in nine years, according to data from the State Bank of Pakistan (SBP). Overall, in the first nine months of the fiscal year, the current account deficit stood at $508 million, substantially lower by 87% compared to $4.05 billion in the same period last year.

The surplus was driven by a surge in remittances during the Ramadan/Eid season and a decrease in the trade deficit, making it the third-highest monthly surplus in the country’s history. Additionally, experts pointed out that high interest rates and import restrictions have contributed to policymakers’ efforts to narrow the current account deficit.

In March 2024, Pakistan’s exports of goods and services amounted to $3.23 billion, while imports totaled $5.249 billion. Remittances in March reached $2.954 billion, marking a 31% increase compared to the previous month. For the first nine months of fiscal year 2024, total exports of goods and services surpassed $28.8 billion, while imports exceeded $46.2 billion, according to SBP data.

In its recent monetary policy statement, the SBP predicted that the current account deficit is likely to remain within the forecast range of 0.5 to 1.5% of GDP for fiscal year 2024, which will bolster the country’s foreign exchange reserves.

The current account holds significant importance for Pakistan, which heavily relies on imports to sustain its economy. A widening deficit strains the exchange rate and depletes official foreign exchange reserves. Authorities in Pakistan are currently seeking a larger loan to bolster macroeconomic stability over the long term. Despite double-digit growth in the previous three months, the country’s merchandise export growth slowed to 7.99% in March. Export figures for the month reached $2.55 billion, up 7.99% from $2.36 billion in the same month last year, as per data from the Pakistan Bureau of Statistics.

The trade deficit expanded by 56.30% year-on-year to $2.17 billion in March. However, the overall trade gap for the first nine months of the fiscal year narrowed by 24.94% to $17.03 billion compared to $22.68 billion in the corresponding period last year. The IMF’s initial review of the $3 billion Stand-by Arrangement projects Pakistan’s export proceeds over the next five years to fall short of the commerce ministry’s ambitious target of $100 billion by the end of FY28. The Fund predicts gradual export growth from $30.84 billion in FY24 to $39.46 billion in FY28.

During the interim government’s tenure, export earnings rose due to various measures, including expedited sales tax refunds to exporters. The Federal Board of Revenue (FBR) disbursed Rs369 billion during the first nine months of the current fiscal year, compared to Rs254 billion issued in the same period last year. Meanwhile, imports surged by 25.86% to $4.73 billion in March 2023 from $3.75 billion in the previous year. The relaxation of import restrictions by the government led to this rapid increase in imports in recent months.

These escalating imports are expected to widen the trade deficit in the final quarter of the current fiscal year. However, the import bill contracted by 8.65% to $39.94 billion in July-March FY24 from $43.73 billion in the corresponding period last year. While some critics attribute the rise in remittance inflows to persistently high inflation, which necessitates greater inflows to support the quality of life of Pakistani families abroad, the fact that there was an increase must be acknowledged. This may signal the decline in overseas Pakistanis’ preference for remitting through the unofficial and illegal hundi/hawala system, which was evident between October 2022 and June 2023. During this period, the policy artificially controlled the rupee-dollar parity, resulting in a significant difference between the official and unofficial exchange rates.

Achieving a lower current account deficit has typically relied on reducing the trade deficit through import restrictions. However, these restrictions face opposition from multilateral organizations like the International Monetary Fund (IMF), which argue that they distort the market. In Pakistan’s case, these restrictions also have a negative impact on productivity, as they slow down or even halt raw material imports. Some foreign exchange restrictions, including those related to fuel imports and repatriation of profits to foreign companies, remain in place. The IMF noted in its first review documents on the Stand-By Arrangement reached last year that there are still complaints about inadequate access to foreign exchange through banks among businesspeople and foreign investors.

The caretaker government had pledged to lift all foreign exchange restrictions by the end of the ongoing IMF program, as mentioned in the first review documents. Despite the withdrawal of import prioritization instructions in June, the current account deficit decreased from $3.3 billion to $1.2 billion during July-November 2023 compared to the corresponding period in FY23.

However, there are other critical components of the current account that deserve attention. Direct investment saw a negative $980 million between July-March 2024, compared to a negative $267 million in the same period the year before. While efforts are focused on attracting foreign investment from friendly countries, the impact will only be reflected in the current account balance sheet once the inflows materialize.

Additionally, portfolio investment, despite a bullish stock market, declined from $1.013 billion in July-March 2023 to a negative $168 million in the same period this year. This trend doesn’t bode well for investment inflows given the prevailing economic situation, although it may not necessarily apply to inflows from friendly countries. Lastly, the net incurrence of liabilities surged from a negative $946 million in July-March FY23 to a concerning positive $3.197 billion in the same period of FY24.

Pakistan’s current account balance is a multifaceted issue, influenced by various factors such as import restrictions, foreign exchange limitations, and investment trends. While efforts to address these challenges are underway, including pledges to lift restrictions by the government, there remain significant hurdles to overcome. Balancing the need for economic stability with the imperative of attracting foreign investment will be crucial for Pakistan’s future fiscal health.