Pakistan’s current account deficit turned red on a large primary income deficit in May 2024, according to a note by brokerage firm Intermarket Securities.
The current account posted a deficit of $270 million in May 2024, marking the first deficit in four months. This follows a surplus of $499 million in April 2024.
For the eleven months of the fiscal year 2023-24 (July-May), the current account deficit expanded to $464 million, compared to a deficit of $3.8 billion in the same period last year.
As per the brokerage note, the primary reason for the negative figure in May was a large primary income deficit of $1.4 billion. Without this, the current account balance would have remained positive despite a wider goods trade deficit.
The primary income deficit surged to its highest-ever level due to $1.5 billion worth of income payments, which likely included interest on foreign debt and a backlog of dividends for multinational companies.
The State Bank of Pakistan (SBP) indicated that the backlog of dividends has been nearly settled, which should reduce the primary income deficit to around $500 million in the coming months.
In May, the goods trade deficit stood at $2.0 billion, higher than April’s $1.8 billion and double the year-on-year figure due to last year’s import restrictions. Imports reached their highest level in fiscal year 2024 to date at $5.0 billion, up 13% month-on-month and 35% year-on-year, driven by seasonally higher petroleum imports (up 8% MoM) and 12% higher machinery imports. Iron and steel imports rose 40% year-on-year, which is also seen as seasonal.
Exports were up 17% year-on-year, boosted by textile exports (up 18% YoY) and food exports (up 55% YoY, with rice exports doubling).
Remittances in May reached $3.2 billion, up 15% month-on-month and 54% year-on-year, ahead of the Eid-ul-Adha holidays in June.
However, remittances are expected to normalize to around $2.5 billion in the coming months.
SBP’s forex reserves remained stable at approximately $9.1 billion by mid-June 2024, equivalent to around two months’ worth of imports. The SBP cut interest rates in June by 150 basis points, bringing the policy rate to 20.5%.
IMS forecasted that various industries, including cement, autos, and steel, are operating at low utilization levels (50-60%), which could lead to a rebound in imports and an expanded trade deficit.
Conversely, stringent budgetary measures for the real estate and textile industries may prolong weak demand, moderating import growth.
Nonetheless, a current account deficit exceeding $500 million is a key risk, with potential negative implications for the exchange rate, inflation, and monetary policy, the brokerage firm added.
