Moaaz Manzoor

Pakistan’s current account turned into a $420 million deficit in January due to the increased import payments, while persistent financial account deficits continue to pressure the State Bank reserves, highlighting the need for capital inflows to sustain external stability, reports WealthPK.

The foreign exchange reserves face renewed pressure, as the net outflows continue, mainly fueled by a widening trade deficit and financial account shortfalls. The current account, which recorded a surplus for three consecutive months, slipped into a $420 million deficit in January 2025, catching the markets off guard.

With the financial accounts remaining in deficit and the balance of payments in the negative territory for the second consecutive month, the depletion of SBP reserves remains a growing concern. Speaking with WealthPK, Ahmad Mobeen, senior economist at the S&P Global Market Intelligence, noted that while Pakistan’s external sector had shown resilience — evidenced by a 7% year-on-year (YoY) rise in exports ($23.9 billion in Jul-Jan FY25) and a 32% surge in remittances ($20.8 billion) — the import growth was outpacing the export gains, leading to external account imbalances.

 “With imports increasing 11% YoY to $39.9 billion, the underlying pressure on the central reserves is unlikely to ease. Despite a nearly 40% YoY rise in foreign exchange reserves to $11.2 billion, the external debt repayments remain a key risk factor.” “Pakistan has over $100 billion in external obligations due between 2025 and 2029, making the reserve accumulation critical,” Mobeen warned.

 “While the remittances have played a pivotal role in stabilizing the current account, their sustainability at this growth rate is uncertain. The Gulf oil prices are expected to remain subdued, which could soften remittance inflows, while the global trade frictions pose risks to the export momentum,” he explained. According to the S&P Global Market Intelligence estimates, Pakistan faces an annual liquidity gap averaging 42.7% of total FX earnings over the next five years, indicating prolonged external financing needs.

Talking with WealthPK, Syed Zafar Abbas, General Manager at Zahid Latif Khan Securities, noted that Pakistan’s current account surplus streak ended in January with a $420 million deficit, mainly due to the higher import payments. Increased shipments in November and December, driven by cheap bank credit, are now translating into payments, with further pressure expected in February.

He highlighted concerns over the persistent financial account deficits, causing a decline in the SBP reserves. Despite a $682 million surplus in 7MFY25, the worsening trade deficit (up 16% to $16.1 billion) and primary income pressures pose risks. While the remittances continue to provide support, they alone cannot sustain external stability, necessitating capital inflows to prevent further reserve depletion.

Credit: INP-WealthPk