Higher imports, funding gap turn tables as Pakistan lands in current account deficit

Given the economic upheaval of recent years, Pakistan's current account posting a surplus for three straight months was a relief. But the trend reversed in January with the current account deficit at $420 million.

A spike in imports pushed Pakistan’s trade deficit higher in January, with goods imports surging 11% to $5.46 billion, while exports slipped 4% to $2.94 billion. This imbalance widened the trade gap to $2.5 billion, marking a sharp 26% increase from the $1.99 billion deficit recorded in the same month last year.

The latest shortfall trimmed Pakistan’s cumulative surplus for the first seven months of the fiscal year (7MFY25) to $682 million.

The reversal comes despite strong support from remittances, which have averaged $2.9 billion per month this fiscal year, a notable increase from the previous $2.3 billion to $2.4 billion range. However, significant imports, particularly energy and essential commodities, offset those inflows, leading to the January deficit.

Pakistan’s imports jumped $560 million in January, with petroleum accounting for 30% of the total amount. Central bank data shows petroleum imports surged 25% to $1.6 billion compared to the previous month – despite lower demand due to lower temperatures.

However, Pakistan Bureau of Statistics data tells a different story, showing a 12% decline. The likely reason? A timing gap – the State Bank of Pakistan tracks payments, meaning past deliveries were settled in January.

Nukta goes in detail about the reasons the trend has reversed and the outlook for the coming months.

Balance of payments under pressure

Pakistan’s balance of payments remained in deficit for the second straight month, with a $322 million shortfall in January. Meanwhile, the State Bank of Pakistan’s foreign exchange reserves dropped by over $300 million since December, reducing the country’s import cover to 2.3 months from 2.8 months.

External loan inflows

Pakistan received $4.6 billion in foreign inflows during the first seven months of FY25, falling well short of the projected annual target of $14.3 billion, according to data from the Economic Affairs Division (EAD). This estimate excludes potential assistance from the International Monetary Fund (IMF).

Multilateral lenders, led by the Asian Development Bank, contributed $2.3 billion, while bilateral creditors, primarily China, provided $329 million. To address the financing shortfall, the government secured $500 million through commercial loans and raised $1.13 billion via Naya Pakistan Certificates.

However, the country remains $3.27 billion short of its targeted $3.78 billion in commercial loans for FY25, leaving a significant funding gap in the remaining months of the fiscal year.

Despite these efforts, Pakistan has yet to tap international bond markets to raise at least $1 billion, which was initially part of its financing strategy. Additionally, planned inflows of $9 billion from time deposits – including $5 billion from Saudi Arabia and $4 billion from China’s SAFE deposits – have yet to materialize.

Surge in remittances boosting outlook

However, remittances continued to surpass the trade deficit, while the services deficit remained relatively low, providing a cushion to the current account.

In January, Pakistan experienced a significant 25.2% growth in workers' remittances compared to the same month last year, totaling $3.0 billion. This surge was primarily driven by contributions from Saudi Arabia ($728.3 million), the United Arab Emirates ($622 million), the United Kingdom ($443.6 million), and the United States ($298.5 million).

Cumulatively, remittances for the first seven months of the fiscal year reached $20.8 billion, marking a 31.7% rise compared to the same period in the previous fiscal year. This growth is attributed to improving macroeconomic conditions, the stability of the Pakistani rupee, and the narrowing spread between interbank and open market exchange rates, with projections estimating total remittances could reach $36.6 billion for FY25.

Earlier in December, Finance Minister Muhammad Aurangzeb projected that total remittances could reach a record $35 billion in FY25, emphasizing the government's efforts to stabilize the economy and reduce inflation.

To further boost foreign exchange reserves, the Economic Coordination Committee (ECC) approved amendments to remittance schemes. The changes involve modifying the Reimbursement of Telegraphic Transfer (TT) Charges Scheme and enhancing incentives for exchange companies when they surrender 100% of foreign exchange in the interbank market, aiming to boost remittance inflows through formal banking channels.

Foreign investment gains through SIFC

The Special Investment Facilitation Council (SIFC) has been instrumental in luring international investment despite the economic strains. In its first year, the council acquired $2.3 billion in foreign investments, demonstrating investors' rising trust in Pakistan's economic reforms.

Key investments include a 150-megawatt solar plant in Sukkur and agreements for new exploration blocks in the energy sector.

The SIFC's efforts also include policy changes, such the E-Rozgar Program, which seeks to build 10,000 centers to increase IT exports, and the Pakistan Startup Fund, which intends to give new companies equity-free funding. These measures are part of a broader strategy to diversify Pakistan’s economy and reduce its reliance on imports, leading to an improved current account position.

The government is maintaining the gradual liberalization of rules on foreign investment to offset investor concerns with regard to security, political and macroeconomic risks.

IMF inflows crucial

Pakistan and the IMF are set for crucial talks as a delegation of the international lender is set to review the country’s economic performance, potentially unlocking a $1 billion loan tranche by mid-April.

Fresh IMF inflows would boost reserves, easing import restrictions and supporting industrial production. Securing financing remains crucial for Pakistan to manage external risks and stabilize its balance of payments.

Future outlook

With rising imports driven by increased economic activity, persistent demand — particularly for energy and food — could push the current account into negative territory. However, strong remittances and exports are anticipated to keep the current account deficit within a manageable range.

The SBP projects the current account balance to fluctuate between a slight surplus and a deficit of 0.5% of GDP in FY25.

Remittances are expected to surpass $3 billion due to the Ramadan and Eid effect, with a conservative annual estimate of $35 billion, according to the finance ministry.

A modest surplus may persist as net financial inflows are expected to improve in the coming months, with a significant portion of official debt repayments already completed.

According to the SBP, Pakistan's total debt repayment requirement for FY25 stands at $26.1 billion, of which $16 billion is expected to be rolled over. Of the remaining $10.1 billion, $6.4 billion has been repaid, while the remaining $3.7 billion is scheduled for repayment by the end of the fiscal year.

The SBP also projects foreign exchange reserves to surpass $13 billion by June, reflecting its optimistic outlook.