Pakistan’s current account balances slip into deficit, threatens exchange rate stability

KARACHI: The finance ministry and the State Bank of Pakistan (SBP) project that the current account balance will be within a range of plus or minus 0.5% of GDP by the end of fiscal year 2025 (FY25).

Despite the SBP’s efforts to bolster its foreign exchange reserves through dollar purchases from the inter-bank market, its reserves have been declining. Over the first four months of FY25 (July to October), the SBP purchased $3.8 billion from commercial banks. However, in a recent eight-week period from December 13 to February 7, the central bank’s reserves decreased by $1 billion.

Bankers attribute the SBP’s ability to purchase dollars, aiming for a target of $13 billion by the end of FY25, to unexpectedly high remittances, which provided ample liquidity in the inter-bank market.

During the first seven months of FY25, the export of goods increased to $19.2 billion, representing a $1.349 billion rise. However, imports experienced a more significant increase, rising by $3.27 billion to reach $33.314 billion during the same period. Exports of services saw a slight increase to $4.749 billion, compared to $4.473 billion in the corresponding period of the previous fiscal year. Imports of services remained relatively stable, totalling $6.678 billion compared to $6.121 billion in the last fiscal year.

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Consequently, the balance of trade in goods and services was negative, at $16.068 billion, from July to January FY25, a deterioration from the $13.866 billion deficit recorded during the same period last year.

While the current account currently shows a surplus, the trend suggests a shift towards a deficit. The biggest risk associated with a current account deficit in the coming months is the potential destabilization of the exchange rate, which has remained stable for over a year, mitigating the risk of dollarization. If the exchange rate destabilises, the demand for dollars could surge, upsetting the entire balance sheet of the external account.

Furthermore, the challenge of external debt servicing remains unresolved. The International Monetary Fund (IMF) is scheduled to conduct a mission next month and is expected to inquire about the country’s plans for repaying its debt obligations during FY25.