The current account surplus streak ended after three consecutive months, as it posted a deficit of $420 million in January 2025. The market took this as a surprise, and the deficit is due to higher import payments. Increased import shipments in November and December (due to banks offering cheap credit to offset the ADR loan) are now translating into import payments, with the pressure expected to continue in February.
The worrisome fact is that financial accounts have been negative lately. As a result, the overall balance of payments has been in the red for the second consecutive month, explaining why SBP reserves are falling. Data from the first week of February suggests that the pressure persists.
Nevertheless, the overall current account posted a surplus of $682 million in 7MFY25, compared to a deficit of $1,801 million in the same period last year. The improvement story is well known—while the trade deficit is worsening (increasing by 16% to $16.1 billion) and the primary income balance remains under pressure (despite a decline in debt interest payments), the current account remains in surplus solely due to the strong performance of home remittances, which are up by 32 percent to $20.8 billion.
The current account posted a deficit of $420 million in January, compared to a surplus of $474 million in the previous month (December 2024). Goods import payments were recorded at $5.5 billion—an 11 percent increase month-over-month. Import payments were 4 percent higher than the PBS (shipment basis), whereas, typically, PBS numbers are higher as they include freight charges.
Sometimes, payments are delayed by SBP (or banks) and are made when dollar inflows improve. Another reason for higher import payments is the spike in imports of certain items in November and December, with payments for these imports now being settled.
A granular analysis reveals that petroleum import payments were significantly higher, standing at $1.57 billion, compared to the previous six-month average of $1.2 billion. This increase was not due to a price hike but resulted from higher import volumes. The additional volumes were not driven by growing demand (as there is currently a supply glut in the market) but rather by the availability of cheap financing for OMCs at the end of 2024, provided by various banks to avoid the ADR tax.
Another area where import payments were higher is textile imports—again, due to the availability of cheap credit. Additionally, there has been a general increase in import payments across various segments, suggesting that economic demand is picking up. If this rising demand is not checked, imports could average $5.5 billion per month in the coming months, once the impact of nearly halving interest rates comes into play. The question is: can we afford this?
Goods exports are performing steadily, with monthly figures hovering around $3 billion. In 7MFY25, total exports increased by 8 percent to $19.2 billion. Textile orders are strong, but exporters are dissatisfied with pricing as their margins are being squeezed. The rice export boom is fading, and any further export growth to match rising import demand is highly unlikely in the next few months.
The story of services exports is promising, with figures consistently exceeding $300 million. However, no dramatic increase is expected—it will likely maintain growth of over 20 percent, but that won’t be sufficient to offset rising import demand.
The standout performer is home remittances, which surged by 32 percent to $20.9 billion. Remittance growth in the coming months may be enough to cover increasing imports and push the current account back into surplus, as Ramadan and Eid typically see peak inflows. However, the key question is what happens after that. While remittances will remain high, they are unlikely to sustain a 30 percent plus growth momentum.
Thus, if economic demand continues to rise in FY26, the current account is likely to slip into a deficit. To ensure reserve accumulation, financial and capital accounts must show a surplus—meaning foreign loans and investments should flow in. So far, there are no signs of this happening. SBP reserves currently cover only about two months of imports, meaning that SBP may have to check import growth in the coming months by adjusting the currency and pausing monetary easing.
Comments