Remittances keep current account in check

Pakistan’s external account has started the new fiscal year on a manageable footing. The current account deficit stood at USD328 million in July, broadly in line with expectations and still modest relative to the size of the economy. At this pace, the full-year current account position should remain around the official target, provided import growth does not accelerate materially.

The composition, however, warrants a closer look.

The goods trade deficit stood at USD3.1 billion in July, while the services deficit added another USD228 million. This pushed the combined goods and services gap to almost USD3.3 billion. The services balance has deteriorated somewhat, but not enough to raise an immediate red flag.

Remittances continue to save the day.

Workers’ remittances brought in USD3.63 billion during the month. That was more than enough to cover the goods and services deficit, leaving the current account gap relatively contained even after the primary income deficit. The resilience of remittance inflows remains the key buffer for the external account.

But this cushion cannot be taken for granted.

The more immediate concern is the widening gap between SBP and PBS import numbers. The divergence has now persisted for a second consecutive month. SBP’s July goods imports stood at USD6.15 billion, compared with $6.89 billion reported by PBS. That is a gap of more than 13 percent. The difference was similarly large in June, when SBP imports came in at USD6.15 billion against USD6.93 billion in PBS data.

Historically, such differences tend to converge. A second consecutive month of double-digit divergence therefore raises the possibility of some catch-up in the SBP numbers in the coming month. If that happens, the current account could come under some pressure.

This matters because the underlying import appetite does not appear particularly weak.

PBS data puts July imports at USD6.89 billion, up 18 percent year-on-year. Exports, meanwhile, rose 9.5 percent to USD2.94 billion. The result was a merchandise trade deficit of USD3.95 billion, up more than 25 percent year-on-year.

The SBP’s own import-payment data also points to a sizeable energy component. July payments for mineral fuels, oils and their distillation products were around USD1.2 billion, although this was lower than the revised June figure of USD1.66 billion. Machinery and electrical equipment imports remained sizeable as well.

The bigger risk is therefore not July itself. It is persistence.

If imports settle around USD6.5 billion a month for a prolonged period, the external account could become considerably more challenging. This is especially true if the energy import bill remains elevated. Pakistan’s import demand is already running ahead of export growth, while the export front does not yet appear strong enough to absorb the widening merchandise gap.

That would put even more pressure on remittances.

The good news is that remittance momentum remains strong. July inflows were USD3.63 billion, taking the external account into the new fiscal year with a useful buffer.

But relying increasingly on remittances to finance a structurally wider goods and services deficit is hardly a durable external-sector strategy.

For now, the current account remains in control. The numbers are not alarming.

The watchpoint is whether the import bill settles at the current elevated level, or whether the recent divergence between PBS and SBP data is merely delaying the inevitable adjustment. If imports stay near USD6.5 billion a month while exports remain muted, the burden on remittances will only grow.