Abdul Ghani

Pakistan’s external sector came under renewed pressure in the first four months of FY2026 as rising import demand outpaced modest gains in exports, leading to a wider current account deficit (CAD). This strain persisted despite strong growth in remittances and steady performance in IT and services exports.

According to the Monthly Economic Update and Outlook for November 2025, Pakistan recorded a current account deficit of $733 million during July–October FY2026, compared to a deficit of $206 million in the same period last year. The widening gap stems mainly from stronger import requirements linked to industrial recovery and higher energy demand.

Goods exports showed limited improvement, increasing by 2 percent to $10.6 billion during the period. The rise was driven by increased shipments of knitwear (8.2%), garments (5.1%), and bedwear (6.9%). These gains reflect a gradual revival in textile orders as global demand stabilises, along with improved availability of imported raw materials.

Imports, however, rose sharply by 9.6 percent, reaching $20.7 billion. Major increases were recorded in crude petroleum (13.5%), petroleum products (10.5%), and palm oil (29.4%), indicating a surge in energy-related purchases and essential food inputs. The resulting trade deficit widened to $10.1 billion, up from $8.5 billion last year, creating additional pressure on the external account.

Service sector performance was mixed. Service exports grew by 15.9 percent to $3 billion, driven by strong IT-related inflows, while service imports rose by 12 percent to $4.2 billion, resulting in a service trade deficit of $1.2 billion. Despite the deficit, the rise in IT exports was significant. Pakistan’s IT sector posted a solid 19.6 percent growth, with exports reaching $1.4 billion during the four-month period, signalling resilience amid global digital expansion.

Remittances provided a substantial cushion to the external account. Inflows rose by 9.3 percent to $13 billion, supported largely by workers in Saudi Arabia (24.2% share) and the UAE (20.7%). These inflows remain crucial for stabilising external finances and supporting domestic consumption during periods of trade imbalance.

Foreign investment trends showed mixed signals. Net foreign direct investment (FDI) declined by 26 percent to $747.7 million, reflecting subdued investor sentiment amid global uncertainty. China emerged as the largest source of inflow ($226.7 million), followed by Hong Kong ($120.1 million). Sector-wise, power ($297 million) and financial services ($259.8 million) attracted the highest investment.

Portfolio investment remained volatile, with private and public foreign portfolio investors recording net outflows of $159.7 million and $378.8 million, respectively. However, the State Bank of Pakistan’s foreign exchange reserves improved, reaching $19.7 billion, including $14.6 billion held by the central bank as of mid-November.

The overall outlook suggests that external pressures are likely to persist in the near term, especially if global commodity prices remain unstable. However, the government expects that strong remittance inflows, an improving industrial sector, and gradual export recovery will help contain risks during the remainder of FY2026.

Credit: INP-WealthPk