Pakistan’s external account has been traditionally vulnerable and in the red most of the time. In 2025 there was a current account surplus of USD 2.1 billion, but it is showing a deficit of USD 624 million in the first two months of FY26. If the trend continues, the year may end with a huge loss.
The latest data shows that the goods trade deficit increased to USD 5.1 billion in two months while the overall balance on goods and services reached USD 5.8 billion. The services balance added another USD 700 million to the deficit in Jul–Aug, as Pakistan paid out for freight, travel, and business services. The primary income account too remains in the red. Outflows of USD 1.5 billion in two months nearly matched total textile exports, our main foreign exchange earner. Then there are payouts for debt service, profit repatriation, and interest obligations. The real culprit is the mounting burden of debt from which there is no relief in sight in the near future.
The import bill has been swelling constantly. Food group imports in Jul–Aug climbed 37 percent year-on-year to USD 1.5 billion. Palm oil imports rose 30 percent, while other food items nearly doubled to USD 460 million. There has been a significant rise in volume terms, suggesting an upward trend in consumption. Machinery imports stood at USD 1.7 billion, up 23 percent, with textile machinery, office equipment, construction and mining equipment all contributing to the rise. Transport imports nearly doubled to USD 626 million, while CKD car imports were up 130 percent to USD 305 million. On the other hand, CBU bus imports jumped 185 percent to USD 34 million. Although overall petroleum imports declined by 5 percent to USD 2.5 billion, related product imports increased 32 percent in quantity.
The biggest worry is that exports remain stagnant, inching up only 1 percent to USD 5.1 billion in Jul–Aug. Food exports fell 26 percent to USD 775 million, while rice shipments showed a downward trend. However, textiles grew by 10 percent to USD 3.2 billion, led by garments and knitwear. Other categories such as leather, sports goods, surgical instruments and others remained stagnant. Only ICT exports rose encouragingly by 18 percent to USD 692 million.
Pakistan’s export sector suffers from long-standing structural weakness. It has a narrow base which is not expanding due to the high cost of energy, punitive taxes and other levies. We continue to sell the same basket of low-value goods into a world where competition as regards quality and price is tough.
Remittances are the only face saver. Amounting to USD 6.4 billion in Jul–Aug, remittances rose 7 percent year-on-year. But remittances depend on the volatile exchange rate and are not a function of policy and long-term strategy. Ours is an import-based economy. Industrial production cannot expand without importing more.
A vital sign of lack of resources and economic shrinkage is the downtrend in development outlays. Although spending crossed the Rs1 trillion mark last year, it has fallen to just 0.8 percent of GDP, the lowest ever. In 2018, this ratio was 2.6 percent but has since been declining, reflecting a steady erosion of the state’s capacity to meet national development needs. For the current fiscal year, the PSDP allocation was reduced to Rs1 trillion, which is a reflection of the constrained fiscal space at the federal government’s disposal, the legacy of imprudent past spending decisions and the steady weakening of the country’s development agenda.
The result is a long list of incomplete schemes, lower sectoral allocations, delays in project completion leading to escalating costs. The most atrocious is the diversion of development funds for deficit financing. Also, from PSDP over Rs70 billion are allocated for parliamentarians’ discretionary constituency schemes – up sharply from Rs25 billion previously, while funding for education and health sectors has been cut. This is unfortunate, showing the distorted priorities of the incumbent government. It is clear that the government gives precedence to its narrow political considerations over pressing national development needs. This approach must change. Instead, power should be devolved to the local government level for efficiency and to ensure effective resource allocation.
Needless to say, the external account cannot be managed by regulating and restricting imports. It can only be reset by lowering tariff walls that inflate input costs, aligning the rupee to the market to keep remittances formal and exports competitive, restructuring debt to create room for investment, and diversifying into new tradables such as agribusiness, engineering goods and IT and other services. Until the recommended steps are taken, Pakistan’s balance of payments will continue to swing between statistical surpluses and rising deficits. The economy is being kept afloat not by productivity gains but by the dollars of migrants sending money home. This policy needs to be reversed for long term economic stability.