The current account returns to manageable levels in August – moving away from last month’s spike. The deficit reached $160 million, which is 79 percent lower than the previous month’s deficit of $775 million. In July, the deficit was higher due to the settlement of backlogged payments, lower export earnings and remittances (as senders waited in anticipation of a currency depreciation or used the informal market where interest rates were very profitable). Now things are back to normal, and flows (exports and remittances) are likely to improve further due to the USD correction in the open market.
The current account deficit reached $935 million in the second fiscal year 2024, a decrease of 54% year-on-year. The merchandise trade balance improved to a deficit of $3.9 billion from $6.5 billion in the same period last year. However, both imports and exports are declining by 26% and 8%, respectively.
Imports of goods reached $4.3 billion in August, a slight increase from the previous month’s $4.2 billion. However, in July, oil imports were very low (due to the payment cycle) and this returned to normal in August. Excluding oil, import payments fell by 10% (compared to the previous month) to $3.1 billion. July was higher due to a sudden jump in imports via non-banks (contract-based import payments) which reached $625 million in July (compared to the previous $12 million average of $230 million) and returned to $250 million in August. It appears that the backlog has been cleared or some of it has been postponed.
There is an uptick in imports across the board suggesting that SBP is easing pressure on letters of credit where restrictions were previously stringent. For example, machinery imports reached $514 million on August 23, the highest number since August 22, and 50% higher than the previous 12-month average.
Interestingly, there are imports in the group of machines (mainly mobile phones) where payments are not routed via interbank. Mobile phone imports reached $5 million in August ($8 million in FY2024) while PBS data (and FBR data) indicate phone imports of $111 million in August ($179 million in FY2024). This means that phones are imported and taxes are paid on them while payments are missing. The missing link is communication with the informal Hundi Hawala market, which is one of the many elements due to which the demand for dollars in the informal market is increasing.
There are other examples to quote. One relates to CBU vehicle imports, with SBP data in the past two months showing $1 million paid while PBS shows imports worth $31 million. There could be several other examples. These payments are usually netted through the informal market through remittances that have moved towards informal channels.
Remittances to households fell by 22 percent to $4.1 billion in the second fiscal year 2024. Now with the crackdown on smuggling and the hundi/hawala market, demand in informal channels has evaporated (at least for now). Interbank rates and open market rates are converging (in fact interbank rates are slightly better for the emitter).
Checks of banking channels indicate that there was a significant rise in home remittances in the first two weeks of September. This increase is likely to continue as the government once again focuses on the Pakistan Remittance Initiative. There is a support mechanism in place whereby the government through SBP provides support to banks to exchange houses in sending countries to compensate them for not charging the sender. The amount has been stuck since November 22 and now the backlog will be cleared and new incentives may be rolled out. Transfers are expected to reach $2.5 billion (or more) per month in the future, as long as the open market rate remains in check and moves along interbank.
Then exports rose in the last week or so. Indeed, export revenues improved in August to $2.4 billion from $2.1 billion in July. However, it is still less than 11 percent of the $2.7 billion on August 23. Exports are likely to rise in September as exporters cut significant volumes. There are signs of new orders arriving as well.
Overall, on the current account, there is likely to be growth in imports, exports and remittances – and the State Bank of Pakistan will continue to require banks to manage their inflows and outflows, implying that the deficit will remain under control.