EDITORIAL: The country’s current account (C/A) posted a deficit of US$420 million in January 2025 after three consecutive months of surpluses. This, coupled with a second consecutive month of financial account deficit, is creating some unease.
The overall balance of payments is negative, and SBP (State Bank of Pakistan) reserves have declined by US$900 million over the past nine weeks. With reserves barely covering a little over two months’ of imports, based on January’s numbers, this is not a good sign. All efforts should be focused on building up reserves to forestall panic from setting in.
However, this is proving to be a painstaking process. According to the SBP Governor, the central bank purchased approximately US$9 billion from the interbank market in 2024. As per published figures, purchases stood at US$3.9 billion from June to October. These purchases helped SBP service external debt — both interest payments (recorded in the current account) and principal repayments (recorded in the financial account).
This strategy has been beneficial, allowing the SBP to boost reserves by US$3.5 billion and reduce forward liabilities in 2024. However, with a growing economic demand, SBP’s ability to continue these purchases is diminishing. SBP buys dollars from the interbank market — mainly from bank treasuries.
Over the past year, the implied rule has been that banks manage inflows and outflows, only opening LCs in line with their inflows. Not every bank has a significant import business, and some banks (the usual suspects) consistently sell to SBP.
The market adhered to these principles in 2024. However, 2025 has started on a shaky note. The interbank market requires more dollars, the current account has slipped into a deficit, and SBP is struggling to purchase from the usual sellers.
This current account slippage was anticipated, and the plan was to generate inflows from the global debt market and attract market-based FDI (foreign direct investment). The finance minister was appointed to leverage his international banking contacts to facilitate these inflows.
He remains focused on this goal, as basic macroeconomic stability has been achieved. However, the expected inflows have yet to materialise. The IMF staff also anticipated financial account inflows and are reportedly surprised by investors’ sluggish response.
There are two plausible reasons for this delay. The first is global: US interest rates are not declining as quickly as previously expected, and the US dollar index is strengthening, keeping funds away from emerging markets.
The second reason could be domestic — political instability and the current regime’s urgency to revive growth while maintaining an artificial stability in the PKR. With the USD strengthening, PKR has appreciated against other currencies, making investors uneasy.
The bottom line is that no significant dollar inflows have arrived so far. As a result of which, SBP is under pressure to maintain a current account surplus to prevent further reserve depletion.
Demand must be managed carefully in the early days of 2025. SBP is not lifting restrictions on auto financing and is reportedly pushing banks to hold surplus dollars, leading to delays in contract and other payments. Banks may also start slowing down the L/C opening process.
The currency may depreciate by a few percentage points, and interest rates may not fall into the single digit in 2025. The federal government may continue running a primary surplus, and a real estate stimulus package may not materialise. The status quo — low inflation and low growth — may persist into FY26. It is a slow and painful process.
The best course of action for the government would be the implementation of structural fiscal and energy reforms with a view to creating an export-led growth culture in the country.
In this newspaper’s view, not only is this the most preferred option, but also the only one left because other choices are not much viable or potent enough to deal with the growing challenge of external account on a confident footing.
Copyright Business Recorder, 2025
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