Trade deficit widens 33% in February

Exports fall and imports rise in double digits, putting pressure on external account

ISLAMABAD:

Pakistan's trade deficit widened over 33% to $2.3 billion in February 2025 as exports plunged while imports grew in double digits, indicating vulnerabilities of the external sector and limitations on the prospects of faster economic growth.

The trade summary released by Pakistan Bureau of Statistics (PBS) on Monday once again underscored that it would take years and a different approach to address the root causes for low exports and lessen dependence on imported raw material for manufacturing finished goods.

The national data collecting agency reported that the gap between imports and exports widened 33.4% in February compared to the same month of last year. Compared to the $1.7 billion trade gap in February last year, the deficit increased to $2.3 billion this year, up $576 million.

It came despite imports standing significantly below $5 billion, but exports too plunged to traditionally low levels.

Imports amounted to $4.74 billion in February, higher by 10%, or $432 million, over a year ago. Imports had earlier gone above $5 billion for two consecutive months, which caused a current account deficit in January. The government could not sustain this trend as its continuation may have put stability of the external sector at risk.

Import restrictions, mostly informal, have been in place for the past almost three years due to external sector challenges. The government has managed to bring the current account deficit under control on the back of compressed imports and some increase in the formal non-debt creating inflows.

Until November last year, imports were kept around $4.5 billion a month due to the less availability of foreign exchange and the central bank's policy to buy dollars from the market to build its reserves.

Exports dropped 5.6% year-on-year, or $144 million, to a mere $2.4 billion last month. After a long time, exports had been increasing and touching nearly $3 billion but the trend once again paused. It is not clear how much of merchandise exports are being misdeclared as information technology exports to evade income tax.

Pakistan Muslim League-Nawaz's (PML-N) Senator Anusha Rahman said last month that textile millers were misdeclaring their exports as IT shipments to avoid the recently levied 29% income tax. Her statement was based on the information provided by the IT industry and was also backed by the sudden mushroom growth in the registration of new IT-related companies.

There are reports that textile exporters are misusing the 0.25% reduced income tax facility for IT and technology-based export income to avoid 29% income tax, said Anusha Rahman, a former federal minister.

Textile and other goods' exporters have started misusing the facility after the government imposed 29% income tax on exporters in the last budget. However, IT-related export earnings have only 0.25% income tax and on the export of services the income tax rate is 1%.

The monthly numbers should be more worrisome for the government, which is claiming that it will be able to achieve $60 billion export target in three years.

On a month-on-month basis, exports dramatically decreased 17.4%, or $512 million, to just $2.4 billion in February. Imports decreased 10% to $4.7 billion as the government could not afford to have a third month of imports above $5 billion and a consequent big current account deficit.

The month-on-month trade deficit remained at $2.3 billion, which was almost at the preceding month's level.

The government has not yet been able to appoint a full-time chief economist in the Planning Commission and the additional charge has been given to the vice chancellor of a public sector university.

Owing to high imports in December and January, the room for central bank to buy dollars from the open market narrowed significantly in January, said senior officials.

During the first eight months (July-February) of the current fiscal year, imports grew 7.4%, or $2.6 billion. Total imports stood at $37.8 billion. Compared to that, exports for eight months amounted to $22 billion, up $1.7 billion, or 8.1%. As a result, the eight-month trade deficit came in at $15.8 billion, up 6.3%, or $940 million.