By Abdul Ghani

Strong growth in Pakistan's services exports helped offset the impact of a widening merchandise trade deficit during FY2025-26, supporting the country's external sector despite higher import payments driven by the economic recovery.

According to the Finance Division's Monthly Economic Update & Outlook (July 2026), services exports increased by 6.8% to US$8.4 billion during FY2025-26, while services imports rose by 8.9% to US$11.8 billion. The expansion in services exports partially mitigated pressure on the external account amid rising imports of goods and services.

The report states that the merchandise trade deficit widened by 8.4% to US$26.4 billion during the fiscal year as imports grew at a faster pace than exports. Merchandise exports increased 4.7% to US$32.1 billion, while imports rose 6.6% to US$58.5 billion, reflecting stronger domestic economic activity and higher demand for imported raw materials, machinery and other inputs.

According to the document, the external sector remained resilient despite the higher import bill. Workers' remittances reached a record US$38.3 billion, increasing 26.6% over the previous fiscal year, while foreign exchange reserves strengthened, helping maintain external stability and improve the country's capacity to absorb external shocks.

The Finance Division notes that the improvement in the external sector was accompanied by stronger foreign direct investment and continued macroeconomic stabilisation. Net FDI increased to US$2.5 billion, while easing inflation, improved fiscal performance and exchange rate stability contributed to a more favourable economic environment during FY2025-26.

According to the report, Pakistan's stronger macroeconomic fundamentals also received international recognition during the year. It notes that S&P Global Ratings upgraded the country's long-term sovereign credit rating from B- to B, citing improved fiscal performance, continued implementation of reforms, stronger institutional capacity and higher foreign exchange reserves.

The document says the government expects the external sector to remain broadly stable during FY2026-27, supported by continued growth in exports and remittances, prudent macroeconomic management and ongoing structural reforms. However, it cautions that geopolitical tensions, volatility in global commodity prices and disruptions to international trade remain important external risks.

The report adds that sustained growth in services exports, together with stronger merchandise exports and record remittance inflows, will remain important for strengthening Pakistan's external account and supporting long-term economic stability as the recovery gathers pace.

Credit: INP-WealthPk