Moaaz Manzoor

Pakistan’s widening trade deficit — fueled by the rising imports, slow export growth, and increasing debt repayments — continues to strain external stability despite a temporary current account surplus driven by substantial remittances, reports WealthPK.

The current account, which recorded a surplus of $474 million in December 2024, slipped to a $420 million deficit in January 2025 — the highest since June 2024. Despite a cumulative surplus of $682 million in 7MFY25, the rising imports and foreign obligations widened the trade deficit by 26% to $2.51 billion, adding pressure on the external accounts.

Speaking with WealthPK, Dr. Junaid Ahmed, Senior Research Economist at the Pakistan Institute of Development Economics (PIDE), noted that although exports had risen, their pace remained slow, raising concerns about the competitiveness of Pakistani products in the global markets and lack of diversification in export destinations. He emphasized that increased imports indicated economic activity but exacerbated the trade imbalance.

A substantial portion of the import bill stems from energy and machinery, which, though essential for industrial growth, further widens the deficit. Without a well-structured export strategy, Pakistan risks sustaining an unsustainable trade gap. Dr. Junaid also pointed out that the exchange rate, which stood at Rs278.64 per USD in January 2025 compared to Rs280.32 per USD in January 2024, had seen a marginal depreciation.

While this could enhance export competitiveness, it increases the cost of imported goods, adding inflationary pressure. He warned that if the trade deficit continued to expand, it could strain foreign exchange reserves and undermine macroeconomic stability. Majid Shabbir, CEO of Ifsha Consultants, noted that the rising primary income deficit reflected higher foreign loan payments, interest costs, and profit repatriation, adding strain to the external account.

Since much of it stems from debt servicing, this signals increasing borrowing needs and a growing external debt burden. While profit repatriation indicates business profitability, it also means less domestic reinvestment. If not offset by strong remittance inflows and export growth, this trend could lead to further currency depreciation.

Despite a positive turnaround in the current account over 7MFY25, the widening trade deficit remains a major challenge. A surplus driven by remittances is not a sustainable solution, as it does not reflect structural economic strength. Without robust export growth and controlled import dependency, Pakistan’s external account vulnerabilities may deepen, increasing the risk of future macroeconomic instability.

Credit: INP-WealthPk