There is a positive development in the national economy in the shape of a surplus of USD 944 million from July to November 2024 in the current account. This compares favourably with a cumulative current account deficit of USD 1,676 million in the first five months of 2023-24 of. Overall, there has been a big improvement of USD 2,620 million in the current account of the balance of payments of Pakistan. But 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.

The reason for this is a decline in the surplus of the financial account of the balance of payments which fell  by USD 2,316 million. This surplus was USD 3,598 million in the first five months of 2023-24 but declined to USD 1,282 million in the first five months of 2024-25. This means that although the current account has become positive after a long time, there has been a substantial deterioration in the financial account.

It is relevant to point out here that if there had been no decline in the financial account, forex reserves would have gone up by almost USD 4.9 billion and touched the level of USD 14.5 billion, providing three months’ import cover. A parallel development is that there has been a worsening in the trade deficit in goods and services of 7.3 percent, due to a rise in imports of 8.4 percent as against 7.4 percent increase in exports.

It is a good augury that there has been a welcome spike in workers’ remittances of 33.6 percent, equivalent to a large absolute increase of USD 3,714 million in only five months. This has been due to a closing of the gap in the exchange rate of the rupee in the official and in the hundi markets. The government expects that this buoyancy in remittances will persist but we must keep it in mind that the world economy is in recession which may affect inflows from this source.

An analysis of the financial account of the balance of payments shows that the deterioration in this behalf is due primarily to two factors. The first is a decline in the net inflow of loans into the government account which from July to November 2024 totalled USD 2,097 million. This is 38.4 percent lower than USD 3,404 million in the corresponding period of 2023-24.

Overall, there is 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.This has given rise to apprehensions 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.

If this deterioration in the financial account persists, then Pakistan will fall way short of meeting its external financing requirements which 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 bilateral and multilateral agencies. This is equivalent to only 19 percent of the annual target. 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, the Fund staff will express doubt about  the financial viability of the Extended Fund Facility.

In the given circumstances, Pakistan may have to seek reprofiling of loans from major creditors like China and international commercial banks to attain external account stability. To this end the role of remittances is of vital importance. Remittances have risen substantially during the last one year but experts opine that they cannot be depended upon in the long term. Instead, they recommend that the government should formulate appropriate policies to boost exports. Textiles, our major foreign exchange earner, deserves special attention in this regard. Similarly, training workers, especially in the IT sector, can enhance services exports. In a nutshell, we can ensure long term external financial stability only by creating a strong and solid export base.