Pakistan’s Current Account Slips into $420 Million Deficit
Pakistan Records Highest Current Account Deficit in Seven Months
KARACHI: Pakistan’s current account registered a deficit of $420 million in January 2025, marking the highest monthly shortfall since June 2024. This downturn follows a surplus of $474 million in December 2024, signaling renewed pressure on the country’s external financial position amid rising imports and foreign payment obligations.
Despite this setback, the cumulative current account balance for the first seven months of fiscal year 2024-25 (7MFY25) remained in surplus at $682 million. This marks a significant improvement from the $1.8 billion deficit recorded in the corresponding period of the previous fiscal year.
Trade Deficit Expands as Imports Outpace Exports
In January 2025, Pakistan’s exports of goods grew by 10% year-on-year (YoY) to $2.94 billion. However, imports of goods surged at a faster rate of 17%, reaching $5.45 billion. This led to a trade deficit in goods widening by 26% YoY to $2.51 billion, adding pressure on the external account.
Similarly, the balance on trade in services remained negative, with a deficit of $315 million—an increase of 10% YoY. Service exports stood at $691 million, while service imports rose to $1.01 billion. Consequently, the overall trade deficit (goods and services combined) expanded to $2.83 billion in January 2025, reflecting a 24% increase from $2.27 billion in January 2024.
Primary Income Deficit Worsens
The primary income balance posted a deficit of $735 million in January 2025, up 12% from the $658 million deficit in January 2024. This was primarily due to rising interest payments on external debt, foreign loan repayments, and higher profit repatriation by foreign investors. Over the first seven months of FY25, the primary income deficit amounted to $5.23 billion, compared to $4.71 billion in the same period of the previous fiscal year.
Experts highlight that an increasing primary income deficit signals growing external debt servicing costs, which could lead to further borrowing and an escalating external debt burden. Additionally, higher profit repatriation by foreign investors indicates business profitability but also underscores capital outflows that could otherwise be reinvested domestically.
Foreign Investment Trends: FDI Rises While Portfolio Investments Decline
Pakistan received net foreign direct investment (FDI) of $194 million in January 2025, reflecting a 15% month-on-month (MoM) increase from $170 million in December 2024. On a YoY basis, FDI inflows rose to $239 million, a 12% increase, while outflows dropped significantly to $45 million, down 87% YoY.
For the first seven months of FY25, net FDI surged by 56% YoY to $1.524 billion, compared to $976 million in 7MFY24.
However, portfolio investments in public securities showed volatility, with a net outflow of $85 million in January 2025, compared to an inflow of $59 million in January 2024. This indicates a fluctuating investor sentiment toward government debt securities.
Overall, total foreign investment in January stood at $99 million, a reversal from the $107 million outflow in January 2024. While sustained FDI inflows are a positive sign, challenges remain in stabilizing portfolio investments.
Remittances Surge, Providing a Cushion
A key positive factor in the current account was the robust growth in workers’ remittances, which surged by 25% YoY to $3 billion in January 2025. This increase is largely attributed to rising emigration in recent years, with over 2 million Pakistanis moving abroad for better economic opportunities.
Overall, the secondary income balance stood at $3.2 billion in January 2025, a 24% increase from $2.58 billion in January 2024. Strong remittance inflows helped offset deficits in trade and primary income, contributing significantly to the overall current account surplus in 7MFY25.
Outlook: Managing Trade Deficit and External Stability
On a cumulative basis, Pakistan’s current account for 7MFY25 recorded a surplus of $682 million, marking a notable turnaround from the $1.8 billion deficit recorded in 7MFY24. This improvement has been driven primarily by strong remittance inflows and moderate export growth.
However, the increasing trade deficit remains a major challenge, highlighting the urgent need for sustained export expansion and controlled import demand. Economic experts emphasize that achieving long-term external stability will depend on boosting exports, managing foreign debt obligations, and ensuring a steady inflow of foreign investments.
FAQs
1. Why did Pakistan’s current account slip into a deficit in January 2025?
The deficit resulted from rising imports and foreign payment obligations, which outpaced export growth.
2. How does the current account deficit affect the economy?
A widening deficit can pressure foreign exchange reserves, impact currency stability, and increase the need for external borrowing.
3. What contributed to the trade deficit in January 2025?
The trade deficit expanded due to a 17% increase in imports, outpacing the 10% growth in exports.
4. How significant are remittances in stabilizing Pakistan’s external account?
Remittances surged by 25% in January 2025, playing a crucial role in offsetting trade and primary income deficits.
5. What are the primary reasons for the increase in the primary income deficit?
Higher foreign debt repayments, interest costs, and profit repatriation by foreign investors contributed to the increase.
6. How did foreign direct investment (FDI) perform in January 2025?
FDI rose by 15% MoM to $194 million, with net inflows improving significantly over the past year.
7. Why did portfolio investments see an outflow in January 2025?
Net portfolio outflows of $85 million indicate volatility in foreign investments in government debt securities.
8. What is the outlook for Pakistan’s current account balance in the coming months?
Maintaining a surplus will require sustained export growth, controlled imports, and continued remittance inflows.
9. How does a rising trade deficit impact economic stability?
A larger trade deficit can deplete foreign reserves, weaken the currency, and increase external vulnerabilities.
10. What steps can Pakistan take to manage its current account deficit?
Boosting exports, reducing unnecessary imports, attracting FDI, and maintaining strong remittance inflows are key strategies.
