While the government is focused on accelerating the development process, troubling news on the economic front continues to overshadow its efforts. According to the latest reports, the current account deficit has surged by more than 255 percent year-on-year during the first four months of the current fiscal year. Imports during July–October 2024 amounted to USD 18.9 billion compared to USD 20.7 billion in the corresponding period of 2025 — an increase of nearly 10 percent. During the first four months of FY25, cumulative exports (goods and services) stood at USD 10.42 billion, while in the same period of FY26 exports rose only slightly to USD 10.63 billion.

Consequently, the trade deficit in July–October 2024 stood at a negative USD 8.477 billion compared to the deficit recorded during the same period this year — an increase of 19 percent. Although remittance inflows rose from USD 11,850.9 million in July–October 2024 to USD 12,955.5 million in the same period this year, the current account deficit still widened. Given the shortage of indigenous financial resources, this deficit is being financed through external borrowing — a burden that continues to grow.

The current situation is largely the result of recent policy reversals by the government. Earlier, under IMF pressure, the government adopted contractionary monetary and fiscal measures that sharply increased input costs. This severely affected the productive sector, and industries dependent on imported raw materials and semi-finished goods were deprived of crucial inputs. Responding to these challenges, the government later eased administrative restrictions on the opening of letters of credit. The SBP also lowered the policy rate. These policy shifts, while necessary to revive industrial activity, have contributed to the widening trade deficit.

Adding to the concerns is a steep decline in foreign direct investment during the first four months of FY26. According to the latest State Bank data, FDI dropped 26 percent year-on-year, falling to USD 747.7 million from USD 1.015 billion previously. This decline stems from falling inflows and rising outflows, resulting in a net reduction of USD 263 million — effectively indicating that foreign firms are repatriating more capital than before.

A similar pattern is evident in portfolio investment. This year saw a net outflow of USD 160 million compared to USD 97 million in the previous year. Foreign public investment has declined even more dramatically, recording a fall of USD 379 million over the period compared to an inflow of USD 283 million last year. Collectively, total foreign investment has plummeted by 82.5 percent to only USD 209.2 million.

All of this reveals a fundamental flaw in Pakistan’s external account management strategy. In recent years, the country has grown increasingly dependent on remittances — a source that, though valuable, is inherently unstable and cannot substitute for sustained foreign investment flows, which are non-debt-creating and essential for long-term external stability.

The decline across all foreign investment categories demonstrates that Pakistan’s investment climate has deteriorated significantly. The combination of rising capital outflows, falling inflows, and shrinking net foreign investment signals that the incentives and security foreign investors seek are not being adequately provided. It should deeply worry the country’s economic managers that instead of attracting new capital, Pakistan appears to be losing the confidence of existing investors, who are withdrawing funds at an accelerating pace.

The situation calls for immediate and decisive action to reverse the negative trajectory in the external sector. Perhaps buoyed by recent increases in remittances, policymakers overlooked the structural measures required to rebuild investor confidence. But the continuing fall in FDI should serve as a serious warning. It reflects an unhealthy economy and a high level of investor apprehension. The first step must be a thorough assessment of why foreign investment has declined and swift action to remove the obstacles deterring investors. Creating an investor-friendly environment requires policy consistency, robust security, and an effective justice system — areas where the current situation remains far from satisfactory.

In an increasingly volatile global economy where external shocks have become routine, Pakistan must strengthen its capacity to withstand disruptions in external financing. Ensuring stable inflows of FDI is crucial in this regard. A well-designed package of incentives — including tax concessions, special economic zones, and free trade areas — could play a meaningful role in attracting sustained foreign investment.