Trade gaps and remittance gains: reading external sector

As the curtain falls on FY25, Pakistan's external sector presents a textured tale – an uneasy mix of fragile resilience and structural imbalance. The numbers offer a surface calm, but beneath them churn familiar anxieties: trade deficits, import dependency, and the perennial hope of remittances acting as a safety net.

The headline: exports improved modestly, imports surged sharply, and remittances delivered a silver lining, cushioning the economy amid external vulnerabilities and policy uncertainty.

Exports: structural ceiling intact

Pakistan's exports rose to $32.3 billion, registering a 4.25% YoY increase. On paper, it is a positive deviation from prior contractions, but when contextualised, the uptick is modest. The textile sector, long the backbone of merchandise exports, retained its primacy, contributing $17.3 billion, a 5.79% growth over FY24. Yet, it ended the year with a slight MoM decline in June, signalling a soft patch in external demand or price competitiveness.

More worryingly, food exports registered a sharp 11% YoY plunge, reflecting both global price corrections and Pakistan's own logistical constraints. The fall in rice and vegetable shipments underscores an opportunity lost.

Still, the structural cap on exports remains. Pakistan's global market share is shrinking, and incremental gains do little to correct the overarching challenge: insufficient transition to high-value exports such as IT, engineering goods, and professional services. Without deep trade facilitation reforms – ranging from port efficiency to regulatory harmonisation – this export ceiling will remain largely intact.

Imports: a surge that speaks volumes

While export performance generated cautious optimism, imports were a thunderclap – loud, broad-based, and unmistakably structural. Pakistan imported goods worth $59.1 billion in FY25, up 11.14% YoY. This figure dwarfs the export tally and reaffirms the country's persistent reliance on imported fuels, machinery, agri-inputs, and even food.

Petroleum imports alone exceeded $15 billion, and while YoY growth was marginal (1.04%), their volume and price insensitivity continue to weigh on the current account. The 63.9% YoY surge in food imports in June, led by cereals, pulses, and edible oil, should set off alarm bells, not least because it lays bare Pakistan's agricultural inefficiencies in a climate-volatile world.

Similarly, imports of machinery (up 15.91% YoY) and agri-chemicals (up 2.73% YoY) hint at underlying investment and production needs. But in the absence of parallel local capacity-building, these categories feed the trade deficit while producing only a delayed productivity payoff. The sobering takeaway: Pakistan imports not just what it consumes, but what it hopes to produce.

Remittances: real hero of FY25

If one strand held the external sector together in FY25, it was workers' remittances. Total inflows clocked in at a record $38.3 billion, marking an impressive 26.6% YoY growth. Saudi Arabia led the charge with $13.1 billion, followed by the UAE ($11.6 billion), the UK ($5.9 billion), and the US ($3.7 billion).

The growth in Gulf and UK corridors is particularly notable – not just for the headline numbers, but for the consistency and stability they bring to an otherwise volatile external account. Even as formal banking channels in Pakistan continue to struggle with compliance and delays, the overseas diaspora has kept faith – an act of economic patriotism that policymakers must now reciprocate through better service delivery.

However, the sharp MoM decline of 7.58% in June suggests the need for caution. Sustaining this trend will require a deliberate policy of skilled labour export, streamlined remittance channels, and incentives for diaspora savings.

Broader picture: cushion or mirage?

Taken together, the external sector's story in FY25 is one of short-term resilience, masking long-term fragility. On the face of it, the trade deficit remains enormous, but it hasn't spilled into panic because of supportive remittance inflows and relatively calm financial markets.

But this calm is brittle. The structural imbalance between what we sell and what we buy remains unresolved. Import substitution has become a catchphrase rather than a coordinated policy, and export growth remains volume-based rather than value-driven. More concerning is the lack of a coherent trade narrative. Pakistan continues to treat exports as a fiscal lever rather than a development strategy. There is minimal investment in certification, branding, or product innovation. Trade corridors remain underutilised and regional integration underleveraged.

What must be done

1. Expand beyond textiles: Incentivise IT services, pharma, and engineering exports with dedicated trade zones and tax support.

2. Cut logistics' costs: Improve port efficiency, digitise customs, and resolve inland freight bottlenecks.

3. Rationalise imports: Tariff engineering and local capacity upgrades can reduce petroleum and agri-related inflows.

4. Leverage remittances: Create diaspora bonds and real estate investment vehicles to channel inflows into productive investment. FY25 gave us a reprieve. FY26 must give us reform.

The writer is a senior banker and teaches economics