In a stark reminder of the economy’s inherent volatility, Pakistan’s current account, which had notched a commendable surplus of $2.1 billion in FY25—the first in 14 years—has abruptly reversed course.
The first two months of the new fiscal year, July and August 2025, saw a deficit ballooning to $624 million, exposing fresh cracks in the external sector’s armor. This slippage isn’t just a blip on the balance sheet; it’s a human story of families scraping by, businesses halting operations, and a nation teetering on the edge of deeper financial strain. While August offered a sliver of hope with the deficit shrinking to $245 million—a 35% improvement from July’s $379 million, thanks to moderated outflows and steadfast remittance inflows—the overall picture remains foreboding. Month-over-month, the gap widened by nearly 200% in August compared to the prior period, and year-over-year, the July-August deficit surged by over 45%. These numbers don’t lie: they underscore a structural fragility that leaves Pakistan’s balance of payments perilously exposed, especially as the devastating floods ravage Punjab and ripple outward.
Picture this: Punjab, the pulsating heart of Pakistan’s agricultural might, often dubbed the “breadbasket” of the nation, is drowning under floodwaters. The 2025 monsoon season, intensified by climate change, unleashed what officials have called the worst deluge in four decades, submerging over 4,000 villages and forcing the evacuation of nearly two million people. Rivers like the Chenab, Ravi, and Sutlej—swollen from heavy upstream rains in India and exacerbated by dam releases—breached their banks, turning verdant fields into vast inland seas. Rice paddies, sugarcane groves, maize plots, and cotton fields, which promised bumper yields just months ago, now lie in ruins. Farmers recount tales of heartbreak. The human toll is staggering—over 750,000 evacuated in Punjab alone, with more than 200 lives lost province-wide, and thousands more injured or displaced nationwide. Rescue operations, involving the Pakistan Army’s helicopters and boats, have airlifted supplies to 511 relief camps, but the scale of destruction defies easy fixes. Livestock drowned by the thousands, homes crumbled like sandcastles, and vital infrastructure—roads, bridges, irrigation canals—lies in tatters, isolating communities and halting the flow of goods.
This catastrophe isn’t occurring in a vacuum; it’s colliding head-on with the economy’s external vulnerabilities. The State Bank of Pakistan (SBP), in its latest monetary policy statement, has flagged the external sector’s susceptibility to these “evolving domestic and global conditions.” Flood-induced crop losses are projected to slash agricultural output, a sector that employs nearly half the workforce and contributes a quarter of GDP. With Kharif harvests—rice and cotton chief among them—decimated, food imports are set to spike, potentially by 20-30% in the coming quarters, according to early estimates from exporters. This isn’t mere speculation; weekly import data already shows a surge in essentials like wheat and edible oils, widening the trade deficit that forms the bulk of the current account imbalance. In July-August, goods imports jumped 15% year-over-year to $38.32 billion, outpacing a modest 2.4% rise in exports to $21.82 billion, leaving a yawning gap. Services trade, too, deteriorated, with the combined goods-and-services deficit hitting $18.76 billion for the period—up sharply from last year.
The floods amplify a pre-existing reversal in the current account’s trajectory, one that policymakers had hoped FY25’s surplus would sustain. That $2.1 billion windfall was a hard-won victory, fueled by prudent import controls, robust remittances topping $30 billion annually, and a narrowing trade gap under IMF-guided reforms. Yet, as the waters recede, the fragility is laid bare: a modest shock like this monsoon fury can undo months of progress. Analysts point to the trade deficit’s persistence—Pakistan’s exports remain stagnant at around $30 billion yearly, dominated by low-value textiles and hampered by global slowdowns—while imports for energy and machinery keep climbing. This imbalance isn’t just economic; it’s a drag on ordinary lives. Small traders in Lahore’s bustling markets, who rely on imported fabrics, face skyrocketing costs; rural households in flood-hit Sialkot watch as their remittance-dependent incomes stretch thinner against rising food prices.
Still, glimmers of resilience pierce the gloom. Remittances, that steadfast lifeline from the diaspora, held firm at $3.1 billion in February alone, helping trim the August deficit. The SBP anticipates the full-year deficit will stay manageable at 0-1% of GDP, a far cry from the 1.7% abyss of FY24. Foreign exchange reserves, a critical buffer, stand at $14.36 billion as of mid-September 2025, up a modest $21 million from the prior week, with projections to reach $15.5 billion by December. This buildup, despite $5 billion in looming debt repayments, owes much to timely rollovers from friendly nations and multilateral inflows. Continued engagement with the IMF—under the ongoing Extended Fund Facility—remains pivotal, promising $7 billion in support to plug financing gaps and enforce fiscal discipline.
Adding a layer of intrigue is the freshly inked Strategic Mutual Defense Agreement (SMDA) with Saudi Arabia, signed on September 17, 2025, during Prime Minister Shehbaz Sharif’s visit to Riyadh. Beyond bolstering security ties—declaring an attack on one as an assault on both—this pact hints at economic lifelines. Saudi Crown Prince Mohammed bin Salman and Sharif discussed expanding bilateral trade and investment, potentially unlocking fresh liquidity through joint ventures in energy, agriculture, and defense manufacturing. For Pakistan, strapped for foreign direct investment (FDI) that has dwindled to under $1 billion annually, this could mean Saudi funds for flood reconstruction or export-boosting infrastructure. Riyadh’s historical generosity—a $3 billion deposit in 2024—might evolve into equity stakes, injecting stability into reserves and easing import pressures. Optimists see it as a gateway to diversified inflows, reducing overreliance on worker remittances that, while reliable, fluctuate with global job markets.
Yet, such hopes must be grounded in reality, lest they foster complacency. Pakistan’s external sector woes stem not from fleeting floods but from entrenched dependencies: official inflows and remittances finance 70% of essential imports, debt servicing, and reserve accumulation, while private FDI evaporates amid political instability and red tape. Industrial output lags, with manufacturing growth at a sluggish 2-3%, and agriculture—battered yet again—yields per hectare trail regional peers due to outdated irrigation and climate vulnerability. Exports, stuck in a low-skill rut, face stiff competition from Bangladesh and Vietnam, exacerbated by a rupee that’s lost 20% against the dollar since 2023. Betting on geopolitical windfalls, like the Saudi pact, to mask these flaws is a gambler’s folly; history—from the 2008 crisis to 2022’s near-default—shows they buy time, not transformation.
The path forward demands bold, consistent reforms, not patchwork fixes. Enhancing tax compliance to hit FBR targets, divesting loss-making state-owned enterprises, and investing in climate-resilient farming—think drought-resistant seeds and elevated embankments—could fortify buffers. Export diversification into high-tech textiles, IT services, and halal products requires policy muscle: subsidies for R&D, trade pacts with the EU and ASEAN, and a stable energy grid to power factories. Fiscal prudence, pairing SBP’s steady 11% policy rate with targeted subsidies for flood victims, would curb import-led inflation without stifling growth.
For the millions in Punjab’s sodden fields, this isn’t abstract policy—it’s survival. As the waters subside, Pakistan stands at a crossroads: cling to short-term salves, or seize this crisis to rewire its economy for resilience. The current account’s slip is a warning siren—heed it, and the nation could yet turn vulnerability into vigor, ensuring that surpluses aren’t anomalies but the new normal. In a world of cascading shocks, from climate fury to trade wars, only structural depth will keep the ship afloat.