Pakistan’s external account is showing early signs of renewed strain, with persistently high international oil prices, a widening trade deficit and sluggish export growth beginning to test the stability achieved over the past year. The situation is not yet alarming, but the warning signs are becoming increasingly difficult to ignore. If import growth continues to outpace exports while remittance inflows lose momentum, pressure on the rupee could intensify and complicate the country’s broader efforts to maintain macroeconomic stability.
The current account recorded a deficit of $328 million in July 2026. On the surface, the figure is relatively manageable and compares favourably with both the preceding month and July last year. However, looking beyond the headline number reveals a more worrying trend. Imports have crossed the $6 billion threshold despite signs that the momentum of large-scale manufacturing is slowing, as reflected in the latest June data. Goods exports, meanwhile, are roughly half the value of imports, leaving the country with a goods trade deficit of around $3.1 billion, an increase of 17 percent over the same month last year.
The widening trade imbalance is particularly concerning because Pakistan’s external position remains heavily dependent on remittances to bridge the gap between what the country earns abroad and what it spends on imports. If that gap continues to widen, the economy will require increasingly strong remittance inflows or additional external financing to prevent pressure from building on the currency and foreign exchange reserves.
The services account provides one of the few encouraging developments. Services exports have continued to perform relatively well, particularly in information and communication technology and other business services. Technology-related exports rose 18 percent in July to $417 million, maintaining the strong momentum seen in recent months.
The expansion of services exports is partly explained by the significant taxation advantage available to workers providing services to overseas clients compared with those employed formally in the domestic economy. The difference in tax treatment creates a strong incentive for skilled workers to serve foreign markets while remaining physically based in Pakistan. This has helped the services sector become an increasingly important source of foreign exchange.
However, the improvement in services is not yet sufficient to offset the deterioration in merchandise trade. The combined goods and services deficit widened by 27 percent to $3.4 billion. Once the primary income balance is included, the overall external deficit rises to approximately $4.2 billion. Against this, remittances amounted to around $3.6 billion in July. The numbers explain why the current account ultimately slipped into deficit: remittances are no longer large enough to completely compensate for the combined external shortfall.
The outlook for remittances also deserves careful attention. More than half of Pakistan’s remittance inflows originate in the Gulf, making the country particularly vulnerable to economic and geopolitical developments in the region. The continuing Iran-US conflict and resulting instability have increased uncertainty, while the possibility of slower economic activity across the Gulf could eventually affect employment and income opportunities for Pakistani workers.
At the same time, geopolitical tensions are contributing to higher international oil prices. For an oil-importing country such as Pakistan, this creates a double burden. Higher petroleum prices increase the import bill precisely when the trade balance is already under pressure. They can also feed into domestic inflation, raising costs across transportation, electricity, manufacturing and other sectors.
Inflationary pressures could become more visible over the next couple of months, with inflation potentially remaining in double digits. That would further complicate monetary policy and could undermine some of the economic momentum that had begun to emerge before the latest geopolitical shock.
The immediate challenge, therefore, is not simply to prevent a current account deficit but to preserve the broader stability painstakingly achieved during the past year. Pakistan’s fiscal position has improved, while debt-servicing costs have declined considerably. These developments provide some protection. But fiscal consolidation alone cannot resolve an external imbalance. The fundamental issue remains the trade account.
The most sustainable solution is to narrow the trade deficit through a combination of slower import growth and stronger exports. The question is how this can be achieved without damaging economic activity. So far, the State Bank of Pakistan has relied heavily on monetary policy to restrain domestic demand. Maintaining real interest rates at positive levels of around 2 to 3 percent or more can discourage excessive consumption and imports, but it comes at a cost. Higher interest rates increase the government’s financing burden and can put additional pressure on fiscal resources, particularly when public debt remains elevated.
There may therefore be a case for allowing the rupee to depreciate gradually rather than relying excessively on high real interest rates to contain demand. A modest and orderly adjustment in the exchange rate could reduce demand for imported goods while improving the competitiveness of Pakistani exports. It could also create some room for monetary policy to operate with less restrictive real interest rates.
The argument becomes stronger when viewed through the real effective exchange rate. Pakistan’s REER reached 107.92 in July, its highest level since May 2018. That compares with 100.0 in July 2025. The sharp appreciation suggests that the rupee has become increasingly strong in real terms relative to Pakistan’s trading partners. With inflation expected to remain elevated, the REER could rise further in August and September.
This does not mean the SBP should allow the currency to fall sharply. A disorderly depreciation could quickly revive the very instability the central bank has spent considerable effort containing. Pakistan has experienced the consequences of delayed exchange-rate adjustment many times: a period of relative currency stability is followed by mounting external pressures, eventually forcing a much steeper depreciation.
The State Bank can reasonably point to its substantial purchases from the interbank market and the resulting improvement in foreign exchange reserves as evidence that the present strategy is working. Those purchases have helped rebuild external buffers and should not be dismissed. But reserve accumulation should not become a reason to ignore emerging market signals.
The wiser approach may be gradualism. If the currency is becoming overvalued in real terms, a controlled adjustment now could prevent a much more painful correction later. Policymakers should ideally act before market participants begin to believe that the exchange rate is being artificially maintained.
Pakistan’s current account deficit is still manageable, and July’s $328 million shortfall does not by itself represent a crisis. But the underlying trends warrant close attention. High oil prices, weak export growth, rising imports, geopolitical uncertainty and the possibility of slower remittance growth could combine to recreate external pressures faster than expected.
The lesson is straightforward: stability cannot be preserved indefinitely through reserves, borrowing and demand suppression alone. Pakistan needs a competitive exchange rate, stronger exports and a broader foreign-exchange earning base. The immediate task for policymakers is to make small adjustments while there is still room to manoeuvre, rather than waiting until the economic pressure becomes impossible to contain.
A cautious, gradual response today could spare Pakistan the far more disruptive currency correction it has repeatedly been forced to endure in the past.