Current Account Surplus of $582 Million: Pakistan’s Economic Resilience Amidst Challenges

January 18, 2025 Mahi Bukhari

Pakistan’s economic stability faces both promising indicators and ongoing vulnerabilities, as demonstrated by the nation’s third consecutive month of a current account surplus in December 2024. The surplus reached $582 million, a remarkable 109% year-on-year increase. This success is attributed to a mix of factors, including robust remittance inflows, improved exports, and moderate global commodity prices, while the widening trade deficit continues to highlight challenges.

Current Account Surplus: A Positive Trend for Pakistan

Pakistan’s economic landscape saw a significant achievement in December 2024 with a current account (C/A) surplus of $582 million. This marked the third consecutive month of surplus, reflecting a 109% year-on-year increase. The key drivers behind this positive development include:

Robust Remittances: There has been an increase in remittance inflows, significantly supported by the migration of human resources.
Moderate Global Commodity Prices: Lower commodity prices on the global market have helped Pakistan maintain better external balances.
Reduced Non-Essential Imports: Due to a declining purchasing power, Pakistan has curtailed non-essential imports, which have contributed to external account stability.

However, despite this surplus, the economy faces some underlying vulnerabilities, such as a widening trade deficit, rising energy prices, and potential risks to remittances. These factors could strain Pakistan’s external financial position.

Trade Deficit Concerns and the Balance of Payments

Although the current account surplus has been achieved, trade deficit concerns persist. Pakistan’s imports have surged above $5 billion in December, creating a trade deficit of $1.7 billion for the month. While the exports rose by 10% year-on-year to reach $3 billion in December, surpassing the monthly average of $2.6 billion for the past year, it wasn’t enough to offset the import growth.

The issue lies in the vulnerability posed by the widening trade deficit, especially considering that imports continue to outpace exports, and any shifts in external factors like global energy prices or a decline in remittances could impact Pakistan’s external financial balance. Analysts remain cautious about the sustainability of this surplus if these trends continue.

Cumulative Current Account Surplus for FY25

For the first half of fiscal year 2024-2025 (1HFY25), Pakistan recorded a cumulative current account surplus of $1.2 billion, in stark contrast to the $1.4 million deficit recorded in the same period last year. This sharp turnaround is driven by a combination of factors:

Exports: Continued growth in export earnings, which climbed to $3 billion in December.
Remittance Inflows: Strong remittance inflows have continued to support the surplus.
Reduced Non-Essential Imports: A decline in non-essential imports due to weaker domestic demand.

Prime Minister Shehbaz Sharif highlighted this success, attributing it to the government’s economic policies and announcing that programs like “Uraan” will further contribute to economic recovery.

Discrepancies in Trade Deficit Figures

The discrepancy between the figures reported by the State Bank of Pakistan (SBP) and the Pakistan Bureau of Statistics (PBS) further complicates the understanding of the trade deficit. The SBP reported a trade deficit $719 million lower than the PBS, reflecting the differences in accounting methods:

SBP follows a cash-based accounting approach, capturing actual cash flows.
PBS uses accrual-based accounting, including deferred payment settlements.

Despite this difference, the figures for 1HFY25 remain close, with the SBP reporting a $11.5 billion trade deficit and the PBS reporting $11.2 billion.

Financial Account Deficit and Its Impact on Balance of Payments

December 2024 also saw a deficit in the financial account, largely driven by external debt repayments to banks. However, there were partial offsetting factors:

Fresh loans of $733 million.
Foreign Direct Investment (FDI) inflows of $199 million.

Despite the financial account deficit, the overall balance of payments (BoP) showed a minor deficit of $73 million for the month, which was a reflection of the pressures exerted by debt repayments. However, the cumulative BoP surplus for 1HFY25 stood at $1.7 billion, signaling resilience in the country’s foreign exchange position.

Strengthening Foreign Exchange Reserves

The balance of payments surplus contributed to strengthening the foreign exchange reserves of the State Bank of Pakistan (SBP), which reached $11.7 billion by the end of December 2024. This improved the import cover to 2.8 months, the highest in nearly three years, providing a degree of comfort for external stability.

Foreign Direct Investment (FDI)

Pakistan’s Foreign Direct Investment (FDI) showed mixed results in December. Net FDI inflows stood at $170 million, lower than $219 million in November 2024. However, for 1HFY25, net FDI inflows grew by 20% year-on-year, reaching $1.3 billion, compared to $1.1 billion during the same period last fiscal year. This growth in FDI indicates confidence in Pakistan’s economic future, even amidst ongoing challenges.

The SBP’s Fiscal Year 2025 Target and Economic Outlook

Looking ahead, the State Bank of Pakistan (SBP) has set a target for the current account balance to remain within 0%-1% of GDP for the fiscal year 2024-2025 (FY25). According to JS Global, this target appears achievable, given the steady inflow of remittances, a balanced trade deficit, and improved export performance.

Analysts note that Pakistan’s reliance on remittances and global demand for exports remains a critical vulnerability. Rising energy prices or a decline in remittances could disrupt the country’s fragile external finances. Consequently, Pakistan must focus on export diversification and managing imports effectively to maintain economic stability.

Sustaining Economic Momentum: Strategic Actions Needed

Pakistan’s economy faces the delicate task of maintaining its momentum, driven by positive export performance and strong remittance inflows. However, to achieve long-term economic resilience, the country needs to:

Diversify exports to reduce reliance on a few key sectors.
Strengthen remittance channels to protect against external shocks.
Manage imports effectively, especially non-essential goods, to mitigate the widening trade deficit.

With strategic reforms and management of external pressures, Pakistan can maintain its current account surplus and address the underlying challenges facing its external account.

FAQs About Pakistan’s Current Account Surplus and Economic Outlook

1. What factors contributed to Pakistan’s current account surplus in December 2024?
The surplus was driven by robust remittances, an improvement in exports, moderate global commodity prices, and a reduction in non-essential imports due to weakened domestic demand.

2. Why did Pakistan’s trade deficit widen despite the current account surplus?
Imports rose above $5 billion in December, creating a trade deficit of $1.7 billion, as exports did not fully offset the import growth.

3. How does the discrepancy in trade deficit figures between SBP and PBS affect the analysis?
The discrepancy arises from differing accounting methods: SBP uses a cash-based approach, while PBS follows an accrual-based system, leading to variations in the reported figures.

4. What is the significance of the balance of payments surplus in 1HFY25?
The $1.7 billion surplus in the balance of payments has helped stabilize foreign exchange reserves, improving import cover and supporting Pakistan’s external financial stability.

5. What are the key risks to sustaining the current account surplus?
Key risks include rising energy prices, a slowdown in remittances, and the potential impact of global economic conditions on export demand.