Remittances keep current account in check

Pakistan's external account entered the new fiscal year with a manageable current account deficit of USD328 million in July. The deficit was relatively small compared to the economy's size, and the full-year position is expected to stay within the official target, assuming import growth doesn't accelerate. However, the composition of the deficit is concerning.

The goods trade deficit was USD3.1 billion, while the services deficit added USD228 million, resulting in a combined gap of almost USD3.3 billion. The services balance has worsened, but not to the point of raising immediate concerns. Remittances have been crucial in keeping the deficit in check, with USD3.63 billion in July covering the goods and services deficit.

However, this buffer is not guaranteed. There is a widening gap between import figures reported by the State Bank of Pakistan (SBP) and the Pakistan Bureau of Statistics (PBS). This gap has persisted for two months, with SBP imports at USD6.15 billion compared to PBS's USD6.89 billion, a difference of over 13%. Historically, such divergences tend to align, but a second consecutive month of double-digit divergence suggests the possibility of catch-up in SBP numbers, which could pressure the current account.

Despite this, Pakistan's import demand appears robust, with July imports up 18% year-on-year. Exports grew 9.5% to USD2.94 billion, resulting in a merchandise trade deficit of USD3.95 billion, up more than 25% year-on-year. The SBP's import-payment data indicates a significant energy component, with payments for mineral fuels, oils, and distillation products at around USD1.2 billion.

The persistent risk lies in whether imports stay near USD6.5 billion a month for an extended period, especially if energy imports remain high. This would exacerbate the external account's challenges, particularly as imports outpace export growth, and the export front does not yet show the strength to absorb the widening merchandise gap.

Remittances remain a strong buffer, with July inflows totaling USD3.63 billion, bringing the external account into the new fiscal year with a useful cushion. However, relying on remittances to finance a structurally wider goods and services deficit is not a sustainable strategy for Pakistan's external sector. The current account remains under control for now, but the key watchpoint is whether imports settle at the elevated level or if the divergence between PBS and SBP data delays the inevitable adjustment.

If imports remain near USD6.5 billion a month while exports stay muted, the burden on remittances will continue to grow.