OPINION: State of BoP

The SBP (State Bank of Pakistan) has released the figures of the balance of payments (BoP) of Pakistan for the first five months of 2025-26. The objective of this article is to highlight any significant developments.

The good news is that there was a surplus in the current account of the balance of payments of USD 100 million in November. However, it is much smaller than the surplus of USD 709 million in November 2024.

There is a significant deficit of USD 812 million from July to November 2025. Here again, there is in sharp contrast with the surplus of USD 503 million in the corresponding months of 2024-25.

The primary reason for the transformation from a current account surplus to a deficit is a big worsening in the trade deficit in goods by USD 3 billion, from USD 9.8 billion to USD 12.8 billion. This is an increase in the deficit of as much as 30 percent.

The trade deficit in goods is higher in July to November due both to a decline in exports and a rise in imports. Exports have fallen by over 3 percent, while import have risen by over 11 percent. The decline in exports in November was larger at almost 6 percent, while imports showed faster growth in the month of as much as 31 percent. This is despite the significant fall in the international prices of oil.

The decline in exports is primarily a reflection of the big fall in rice exports. Between July and October, the quantity of rice exports has declined by as much as 37 percent. Within imports, the big increases have been in palm oil of 29 percent, in machinery of 21 percent and of as much as 111 percent in the transport group. Clearly, the improvement in the foreign exchange reserves has facilitated the relaxation of import curbs, especially on automobiles.

The trade deficit in services has remained, more or less, unchanged. Exports of services, especially of information technology, have shown a promising growth rate of almost 17 percent. Hopefully, this will be sustained.

Developments on the secondary income front are of primary importance. Workers’ remittances growth of almost 27 percent contributed to the generation of a current account surplus of over USD 2 billion in 2024-25. This was attributable largely to diversion of flows from the hawala/hundi market.

The situation in the first five months of 2025-26 is of continued growth in remittances of close to 9 percent. This has not been adequate to ensure a surplus again in 2025-26, up to November. The growth rate is likely to be even lower in coming months because of the high ‘base effect’, with the upsurge in remittances being exceptionally high in the third quarter of 2024-25 with to a growth rate of 34 percent.

There is a need to make an important observation about the trends in the current account of the balance of payments. The big increase in remittances has helped in containing the deficit and providing nominal stability to the exchange rate.

The latest estimate of the Real Effective Exchange Rate Index is close to 105. This rise in the value of the rupee is having a sizeable impact on the trade deficit. It has led to a decline in exports and a big jump in imports. We are beginning to see the same worsening of the current account with a rise in the value of the rupee as we saw from 2013-14 to 2016-17. The IMF expectation in the recent Staff Report, after the second review of the IMF programme, is that the rupee ought to depreciate to Rs 297.50 per USD by the end of 2025-26.

There is need also to see if the outcome in the current account is consistent with the projections in the IMF Program for 2025-26. The annual deficit is projected at USD 2 billion. With the actual deficit at USD 812 million, indications are that the outcome up till now is consistent with the IMF projection. However, these IMF projections expect some growth in exports and less of an increase in imports than has actually happened from July to November of 2025-26.

The implication is that trade deficit may begin to be larger. This will partly be the consequence of the negative impact of the floods on rice exports and an increase in cotton imports in coming months. There is also the possibility of higher wheat imports.

Turning to the financial account of the balance of payments, there is room for some concern here also. The net inflow into this account has declined by 39 percent. This is in sharp contrast to the IMF Programme projection for 2025-26, whereby the net inflow is expected to increase by as much as 48 percent.

There are two reasons for the decline. The emergence of a host of negative factors has led to a sharp reduction in foreign direct investment. It has fallen by as much as 35 percent to USD 818 million in the first five months. At this rate, the target of USD 2.3 billion by the IMF in 2025-26 is likely to be missed.

The other negative factor is the lack of growth in disbursement of loans into the government account. They have remained unchanged at USD 1.9 billion in the first five months of 2025-26. The expectation in the IMF Programme is that the disbursement will be as much as USD 9.1 billion in 2025-26.

The Ministry of Economic Affairs has highlighted that this is primarily due to a lack of inflows from private lenders. For example, the target level of borrowing in 2025-26 is USD 3.1 billion from international commercial banks, but no loan has been contracted till the end of November.

The overall balance in the balance of payments is near zero at only USD 74 million, implying virtually no change in the foreign exchange reserves in the first five months of 2025-26. The expectation, however, is that the reserves will increase by USD 3.3 billion by the end of the year. The recent receipt of the USD 1.2 billion loan installment from the IMF will lead to a significant increase in reserves. However, there has been a slowing down of 27 percent in loan repayments, which will need now to be accelerated. Therefore, the target of a USD 3.3 billion increase in reserves may be difficult to achieve in 2025-26. This will imply a failure of the IMF Programme to sufficiently improve the financial sustainability of Pakistan’s external transactions.

Clearly, the time has come for the SBP to reflect on its policy of maintaining nominal stability in the value of the rupee. The current account deficit is showing a rising tendency, with falling exports and rising imports. Foreign direct investment is also declining and private international lenders continue to show reluctance to extending loans to Pakistan. There is a definite risk that the balance of payments position could worsen further in coming months.

Copyright Business Recorder, 2025