By Farooq Awan

Pakistan recorded a current account deficit of $1.4 billion during the first half of FY26 as a sharp increase in imports and weakening exports offset strong remittance inflows, according to the State Bank of Pakistan’s Half Year Report 2025-26.

The report showed the current account swung from surpluses of $0.9 billion in both halves of FY25 to a deficit of $1.4 billion during H1-FY26.

Despite the deterioration, the SBP described the external deficit as “moderate,” noting that workers’ remittances and financial inflows continued to provide important support to the balance of payments.

According to the report, imports increased 12.4 percent during H1-FY26 while exports declined 5 percent.

The widening gap reflected stronger domestic demand, rising industrial imports and weak performance in key export categories, particularly rice.

The central bank said the increase in imports was largely volume-driven and linked to the broader recovery in economic activity. Import growth was visible across machinery, metals, transport equipment and industrial raw materials after tariff rationalisation measures under the National Tariff Policy 2025-30.

Lower international energy and raw cotton prices helped partially contain the import bill, but this was outweighed by rising import volumes.

Exports, meanwhile, remained under pressure despite improving global trade conditions.

The report said Pakistan’s export decline was led mainly by significantly lower rice exports because of falling global commodity prices, stronger international competition and disruptions associated with the closure of the western border.

Value-added textile exports showed relative resilience, but gains in that segment were insufficient to offset broader weakness in merchandise exports.

The SBP linked the weak export performance to deeper structural problems in Pakistan’s economy, including low productivity, policy inconsistencies, weak integration into global value chains and limited market diversification.

These weaknesses have contributed to a long-term decline in exports as a share of GDP over the past two decades.

Despite the widening trade gap, strong remittance inflows prevented a more severe deterioration in the current account.

Workers’ remittances increased to $19.7 billion during H1-FY26 compared with $17.8 billion in the same period last year.

The report said favourable labour-market conditions in GCC economies, increased labour migration and policy measures aimed at reducing remittance transfer costs supported the rise in inflows through formal channels.

The SBP also noted that exchange-rate stability and a low kerb-market premium encouraged overseas Pakistanis to use banking channels for transfers.

Pakistan’s liquid foreign exchange reserves rose to $16.1 billion by the end of December 2025 from $14.5 billion at the close of FY25.

The central bank said reserve accumulation and exchange-rate stability helped strengthen confidence in the external account despite the widening current account deficit.

However, the report warned that the outlook has become more uncertain following the outbreak of war in the Middle East.

The conflict has pushed up global oil prices and increased freight and insurance costs, which could raise Pakistan’s import bill in coming months.

The SBP also warned that slower global growth and supply-chain disruptions may further weaken exports, while economic uncertainty in Gulf economies could eventually affect remittance inflows.

For FY26, the central bank projected the current account deficit in the range of 0 to 1 percent of GDP.

Economists say the relatively moderate current account deficit reflects stronger macroeconomic management compared with previous external crises. However, they caution that Pakistan remains highly vulnerable to external shocks because export growth remains weak and import dependence remains high.

The report stressed that long-term external sustainability will require stronger export competitiveness, higher productivity and diversification into higher-value products and markets.

Credit: INP-WealthPk