The State Bank of Pakistan’s summary for January 2025 reports a current account balance of $7,273 million. In December 2024, Pakistan recorded a current account surplus of $1.5 billion, a significant improvement from the $402 million deficit in the previous quarter.
Recently, the World Bank approved a $20 billion lending package over the next decade to support Pakistan’s economic stabilization and reforms. Despite these positive developments, Fitch Ratings warns of substantial external financing risks for Pakistan in 2025, with over $22 billion in external debt repayments due.
While Pakistan’s recent balance of payments data shows a current account surplus, the country faces significant external financing challenges in the coming days. Pakistan’s external sector is under severe strain, with a persistent balance of payments crisis driven by chronic trade deficits, external debt pressures, and a volatile exchange rate. Past stabilization measures, such as import restrictions, have largely resulted in economic contraction rather than meaningful growth.
Foreign exchange reserves held by the State Bank of Pakistan declined to $2.9 billion on 3rd February 2023 from a peak of $20.1 billion in August 2021. Such low levels of foreign exchange reserves discourage investors and raise fears of an economic default. This has serious implications for the currency exchange rate, which continues to depreciate.
The economic crisis in Pakistan has its roots in the government’s inability to meet its external debt obligations, a problem that is linked to the country’s trade disequilibrium. Pakistan’s current account, which reflects the country’s net trade in goods and service and is an important component of the balance of payments, has consistently recorded large deficits over the years. As per data from the SBP, the current account deficit was at $17.4 billion in FY22. Imports outpaced exports by approximately $45 billion, with remittances, valued at $31.3 billion, softening the blow. Clearly, one of the major reasons behind our economic crisis is the trade deficit as exports are worth only 45 per cent of imports.
There are many factors behind this imbalance, primarily a lack of efficiency across different sectors, including the labor and capital markets. These inefficiencies mean Pakistani producers are unable to productively compete with foreign producers, particularly those located in the neighbouring Asian region.
One major hurdle is lack of industrialisation. Due to this, the capacity to generate exports has not increased in Pakistan relative to its peers, which reduces the ability of exporters to take advantage of a depreciating currency that should otherwise boost exports. This lack of productivity, in turn, impacts the level of industrialisation and consequently the ability of Pakistani producers to compete in the world market.
In this context, the success story of Vietnam is widely known. However, Cambodia also has reported significant export growth in the previous decade. According to WB figures, Pakistan reported higher manufacturing value addition than both Bangladesh and Cambodia in 2000 but lower values than India and Vietnam. However, it reported the lowest value amongst the five countries in 2021. Pakistan’s exports per capita in 2000 were higher than that of Bangladesh and India.
During the last 20 years, the level of industrialization in Pakistan has reduced relative to that in Bangladesh and Cambodia. While Pakistan has only managed to double the value between 2000 and 2021, India has almost tripled it. Bangladesh, Cambodia and Vietnam have more than quadrupled it. As a result, the low level of industrialisation in Pakistan has resulted in lower exports and created a chronic balance of payments crisis.
Experts are of the opinion that Pakistan’s balance of payments crises are unlikely to be resolved through short-term measures like import bans, which have only disrupted industries and constrained economic growth. A sustainable solution requires boosting industrial production, diversifying exports, and reducing reliance on imported fuel through energy efficiency and renewable investments.
By strengthening foreign exchange reserves, improving trade competitiveness, and fostering a transparent policy environment, Pakistan can attract investment and stabilize the external sector. By prioritizing long-term structural reforms, we can build a resilient economy capable of sustaining growth and reducing external vulnerabilities.
We should specially focus on strengthening industrial production and raising exports. The need is to correct the structural trade imbalance. Successive governments have relied heavily on external borrowing rather than improving productivity. A more sustainable policy would be to strengthen export capacity, enhance energy efficiency, and restrain unbridled consumption to address the trade imbalance effectively.
In this regard Pakistan should incentivize value-added production by improving trade facilitation, providing targeted subsidies for export-oriented industries, and expanding regional trade with Central Asia, Africa, and ASEAN markets. A sustainable external sector strategy also requires reducing reliance on imported goods by developing local supply chains and supporting small and medium enterprises.