FeaturedNationalVOLUME 19 ISSUE # 47

Some positive shifts

In September 2024, Pakistan’s exports surged past the $2.8 billion mark, marking a welcome turnaround after months of sluggish performance. This rise is highlighted by a notable increase in merchandise exports, which reached $7.9 billion during the first quarter of the fiscal year, a significant 14.1% increase compared to the same period last year. Bolstered by robust remittances from overseas Pakistanis and fresh financial support from the International Monetary Fund (IMF), this growth signals a critical shift in the country’s economic landscape, even as it grapples with ongoing challenges like a widening trade deficit and tight foreign exchange reserves.

Pakistan’s current account balance has returned to a surplus of $75 million in August 2024, driven by strong inflows from workers’ remittances and a rise in IT exports. This represents a significant turnaround after three consecutive months of deficit, indicating that the inflow of foreign currency exceeded demand, even as payments for pending imports continued.

Data from the State Bank of Pakistan (SBP) shows that this surplus in August helped reduce the cumulative current account deficit for the first two months (July-August) of the fiscal year 2024-25 to $171 million, marking an impressive 81% decrease from the $893 million deficit recorded during the same period last year.

Workers’ remittances surged by 40%, reaching $2.94 billion in August 2024 compared to $2.09 billion in August 2023. Additionally, IT exports saw a 27% increase, totaling $298 million for the month. While overall services exports declined from $663 million to $620 million year-on-year, the IT sector’s contribution grew to 48% of total exports.

On the export front, the SBP reported declines in textile and food exports among other categories. Experts anticipate that the current account balance will stabilize near breakeven in the coming months, thanks to government and central bank policies aimed at curbing imports to align with export earnings and remittance inflows.

Moreover, falling global oil prices have substantially reduced Pakistan’s energy import costs, further supporting a favorable current account balance. Looking ahead, the government aims to keep the current account deficit for FY25 within the central bank’s projected range of 0-1% of GDP (up to $3.5 billion), relying on continued robust inflows from remittances and IT exports. The recent migration of many Pakistanis to international job markets is expected to further enhance remittance inflows as they send money home to support their families.

In August, overseas Pakistanis invested an additional $165 million through the Roshan Digital Account (RDA), which has been vital in strengthening the balance of payments and facilitating the return to surplus. These inflows have also helped bolster the country’s foreign exchange reserves, which climbed to a 26-month high of $9.47 billion. Since the launch of the RDA in September 2020, total gross inflows have reached $8.58 billion by the end of August 2024. Of this amount, non-resident Pakistanis have withdrawn $1.65 billion and used $5.44 billion to support their families back home, resulting in a net repatriable liability of $1.49 billion. RDA holders have also invested $370 million in high-return Naya Pakistan Certificates (NPCs) and $638 million in Shariah-compliant NPCs. Furthermore, they invested $41 million in the Pakistan Stock Exchange, maintained $421 million in their RDA accounts, and allocated another $33 million in various other investments. Pakistan’s trade deficit did expand slightly to $5.4 billion in the first quarter of the current fiscal year, but this was largely due to double-digit growth in exports alongside careful management of imports, which has helped maintain foreign exchange reserves at $10.5 billion.

Exports showed positive momentum, surpassing the $2.8 billion mark in September for the first time in four months, as reported by the Pakistan Bureau of Statistics (PBS). Merchandise exports reached $7.9 billion during the first quarter (July-September), reflecting an increase of $974 million, or 14.1%, compared to the same period last fiscal year. This increase in exports nearly matches the $1.02 billion loan tranche Pakistan received from the International Monetary Fund (IMF) at an interest rate of approximately 5%.

The current fiscal year has seen healthy growth in both exports and remittances from overseas Pakistanis, which are crucial non-debt creating sources of foreign inflows. This provides the government with an additional cushion of about $600 million per month, even as foreign exchange reserves remain tight.

Following the IMF’s recent financial assistance, gross official foreign exchange reserves have risen to around $10.5 billion. However, this amount is still below the minimum required to cover three months’ worth of imports. Imports rose nearly 10%, increasing by $1.2 billion to reach $13.3 billion during the first quarter, according to the national data agency.

The trade deficit widened by 4.2% to $5.4 billion in the first three months of the current fiscal year, an increase of only $224 million, largely attributed to the rise in exports. The pace of the deficit’s growth was significantly slower than in previous years, thanks to improved export performance and strict controls on imports.

Last fiscal year, rice exports had played a substantial role in boosting Pakistan’s overall exports. However, with India lifting its ban on rice exports, this contribution is now at risk. PBS data indicates that the trade deficit grew by one-fifth in September compared to the same month last year, reaching $1.8 billion. Exports in September totaled $2.8 billion, an increase of $334 million, or 13.5%, while imports jumped to $4.6 billion.

The trade deficit saw a 2% month-on-month increase, rising to $1.8 billion due to slight growth in both exports and imports. Earlier, Pakistan struggled with external debt-creating flows without an IMF support framework. With the approval of a $7 billion three-year program by the IMF, the country is expected to maintain its foreign currency reserves in double digits.

However, the IMF has reiterated the need for currency depreciation. In a recent statement, the IMF executive board emphasized that allowing the exchange rate to act as a shock absorber is crucial for enhancing competitiveness and rebuilding reserves. The relatively low import levels are negatively affecting the revenue targets set by the Federal Board of Revenue (FBR). In the first quarter of FY25, the FBR collected Rs901 billion in taxes related to imports.

Import taxes constituted 35% of the total tax revenue collected during this period, a decrease from 40% a year earlier. Before the economic crisis struck Pakistan two years ago, import tax collection accounted for over half of total tax receipts. Typically, Pakistan’s monthly import bill ranged between $6 billion and $6.5 billion, but the government has since restricted it to below $5 billion due to limited foreign exchange reserves.

While Pakistan’s recent export growth and the return of a surplus in the current account balance are encouraging signs, they come against a backdrop of significant economic hurdles. The dependency on remittances and the continued need for IMF support underscore the fragility of the recovery. Looking ahead, sustainable growth will depend on strategic economic reforms, a stabilization of imports, and efforts to bolster the tax base. By addressing these challenges, Pakistan can work towards a more resilient economy capable of supporting its citizens and maintaining a favorable balance of trade.

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