Current Account Surplus Hits $349 Million

In October 2024, Pakistan achieved a current account surplus of $349 million, marking the third consecutive monthly surplus. This positive development is largely attributed to a significant increase in workers’ remittances and an improvement in export earnings. This article delves into the details of this economic milestone, examining its causes, implications, and future outlook.

Key Factors Driving the Surplus

Surge in Workers’ Remittances

One of the primary contributors to the current account surplus is the substantial increase in workers’ remittances. Inflows of remittances spiked by 24% to reach a four-month high of $3.10 billion in October, compared to $2.53 billion in the same month of the previous year.

Growth in Export Earnings

Pakistan also saw a notable improvement in its export earnings. The export of goods increased by 11% to $3.02 billion in October, up from $2.72 billion in the corresponding month last year. Additionally, the export of services grew by 13%, reaching $689 million compared to the previous year’s figures.

Impacts on the Economy

Currency Stability and Foreign Exchange Reserves

The current account surplus is expected to help stabilize the Pakistani currency against the US dollar and other global currencies. It will also bolster the country’s foreign exchange reserves, enhancing its capacity to pay for rising imports and repay maturing foreign debt.

Economic Growth Constraints

However, the surplus has come at a cost. Economic growth has been limited to 2.5% for FY24 due to the suppression of imports to cool down an overheated economy. High inflation and large current account deficits have previously compromised industrial output and employment opportunities.

Import Control and Risk Management

Restricted imports have played a crucial role in boosting Pakistan’s foreign exchange reserves, providing two months of import cover compared to less than one month in June 2023. This strategy has helped stave off the risk of default on foreign debt obligations.

Positive Responses from Credit Rating Agencies

Upgraded Credit Ratings

The improvement in reserves and the balancing act between imports and exports have led to upgrades from global credit rating agencies. Moody’s and Fitch both upgraded Pakistan’s rating by one notch within the ‘C’ category during July-August 2024.

Monthly and Yearly Comparisons

Month-on-Month Performance

According to the State Bank of Pakistan (SBP), the current account recorded a deficit of $287 million in October of the previous year. On a month-on-month basis, the surplus surged by over 300%, rising to $349 million in October 2024 compared to $86 million in September.

Cumulative Performance

The notable surplus in October has led to a cumulative current account surplus of $218 million for the first four months (July-October) of the current fiscal year. This is a significant improvement compared to a deficit of $1.53 billion in the same period last year.

Detailed Breakdown of Trade Figures

Export and Import Figures

The export of goods increased by 11% to $3.02 billion, while the export of services improved by 13% to $689 million. On the other hand, the import of goods rose by 5% to $4.60 billion, and the import of services increased by 17% to $950 million in October 2024.

Future Projections and Economic Outlook

SBP’s Projections

The SBP has projected the full fiscal year current account deficit to be in the range of 0-1% of GDP, anticipating higher imports and economic activities later in the year. This forecast comes amid a slowdown in inflation, which receded to single digits at 7.2% in October, compared to the multi-decade high of 38% in May 2023. Additionally, there has been a substantial reduction in interest rates on credit supply to the private sector.

Government Strategies and Estimates

According to Muhammad Awais Ashraf, Director of Research at AKD Securities, the government aims to maintain the current account balance at a breakeven level throughout the fiscal year. This strategy is designed to address a projected shortfall of $2.5 billion in foreign financing. Authorities estimate the current account deficit to be a maximum of $4 billion, with efforts to restrict it to $1.5 billion to fill the foreign financing gap.

Import Management and Economic Growth

The government plans to maintain imports near $5 billion a month for the remaining eight months of the fiscal year, compared to slightly above $4.5 billion in the first four months of FY25. Consequently, economic growth is expected to remain moderate, within the SBP’s projected range of 2.5-3.5%.

Continued Support from Remittances

Robust inflows of workers’ remittances, averaging around $3 billion a month, will continue to support the current account balance. These remittances are a critical source of improving the balance of international payments and boosting foreign currency reserves.

Finance Minister’s Projections

Remittances Forecast

Finance Minister Muhammad Aurangzeb recently projected that remittances for FY25 would reach $34 billion, up from $30.25 billion in FY24, representing a year-on-year growth of 12%.

Government’s Import Strategy

The government has limited imports to the sum of inward remittances and export earnings, resulting in a current account surplus for the past three consecutive months. This strategy is expected to continue in the future.

Conclusion

Pakistan’s current account surplus of $349 million in October 2024, supported by a spike in remittances and export earnings, marks a significant economic achievement. Despite the challenges of limited economic growth and restricted imports, the surplus has stabilized the currency, improved foreign exchange reserves, and earned positive ratings from global credit agencies. The government’s strategic management of imports and remittances is expected to maintain a balanced current account, contributing to the country’s economic stability and growth prospects.

FAQs

1. What is a current account surplus?

A current account surplus occurs when a country’s total exports of goods, services, and transfers exceed its total imports, leading to a positive balance in its current account.

2. How does a current account surplus affect the economy?

A current account surplus can stabilize a country’s currency, boost foreign exchange reserves, and enhance its ability to pay for imports and repay foreign debt. However, it may also indicate limited economic growth if achieved by restricting imports.

3. Why have workers’ remittances increased significantly?

Workers’ remittances have increased due to improved global economic conditions, better employment opportunities abroad, and effective government policies encouraging remittance flows through formal channels.

4. What role do exports play in achieving a current account surplus?

Exports generate foreign exchange earnings, which contribute to a current account surplus. An increase in exports indicates a competitive economy and helps balance the trade deficit by offsetting import costs.

5. What are the government’s strategies for maintaining a current account surplus?

The government aims to balance imports with remittances and export earnings, manage foreign financing gaps, and support economic activities through strategic import control and encouraging remittances.

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