External account deficit widens

Pakistan's external account is once again showing signs of fiscal year 2015-16, when an uptick in the economy increased imports due to rising demand widened the current account deficit (CAD).

Heavy primary income outflows, and sluggish foreign investment are all also contributing to widening the CAD.

Fresh data released by the State Bank of Pakistan (SBP) paints a sobering picture of the country's balance of payments for August 2025 and the first two months of FY26.

The country posted a current account deficit of $245 million in August 2025, a sharp rise from the $82 million shortfall recorded in the same month last year. According to Arif Habib Limited (AHL), this increase was driven primarily by stronger import demand.

"This increase is attributed to increased import demand," noted AHL.

Over the July-August period, the CAD ballooned to $624 million, up from $430 million a year earlier. This marks a reversal from earlier months when remittances had kept the external gap in check. Analysts warn that unless corrective steps are taken, the widening CAD could weigh on foreign reserves and undermine exchange rate stability.

Pakistan's goods exports in August 2025 totalled $2.51 billion, reflecting a 3% rise from $2.44 billion last year. Over two months of FY26, goods exports stood at $5.29 billion, representing 10.2% growth year-on-year. Yet imports continued to overshadow gains. Goods imports reached $4.98 billion in August, up 6% year-on-year. For July-August, imports totalled $10.4 billion, widening the trade deficit in goods to $5.1 billion compared with $4.8 billion last year. While exports showed improvement in sectors such as textiles and IT services, the pace of import growth, largely in energy, raw materials, and machinery, remains a challenge.

AHL noted that total exports of goods and services in August were $3.18 billion, but imports surged to $6.1 billion, resulting in a trade balance on goods and services of negative $2.9 billion.

Service exports offered some support, reaching $671 million in August, driven by IT and business services.

YoY growth in IT exports during the month is due to (1) IT export companies growing client base globally, especially in GCC region, (2) relaxation in the permissible retention limit by the SBP, increasing it from 35% to 50% in the Exporters' Specialised Foreign Currency Accounts, (3) allowance of equity investment abroad through these foreign currency accounts and (4) stability in PKR encouraging IT exporters to bring higher portion of profits back to Pakistan, mentioned Topline Securities.

According to a Pakistan Software Houses Association (P@SHA) survey, 62% of IT companies are maintaining specialised foreign currency accounts.

"In our view, SBP's introduction of Equity Investment Abroad (EIA), allowing IT exporters to acquire interest in entities abroad using up to 50% proceeds from specialised foreign currency accounts, will continue to boost the confidence of IT exporters to remit proceeds back to Pakistan," noted Topline.

Over July-August, services exports amounted to $1.4 billion. However, services imports rose faster to $1.1 billion in August and $2.1 billion over two months, widening the services trade deficit to $708 million compared with $604 million last year. Transport and travel imports were the main culprits, reflecting higher oil prices and outbound travel spending. This offset gains from digital exports, underscoring the difficulty of narrowing the services gap in the short term.

Perhaps the most pressing challenge is the rising primary income deficit, which climbed to $680 million in August compared to $562 million a year ago. Over two months of FY26, this deficit hit $1.49 billion, up from $1.36 billion in the same period last year. These payments, largely in profit repatriations, dividends, and interest on external debt, represent a recurring structural drain.

One bright spot is workers' remittances, which rose 7% year-on-year to $3.1 billion in August. Over July-August FY26, remittances reached $6.4 billion, up from $5.9 billion last year. This steady inflow provided much-needed support, cushioning the impact of the rising trade and income deficits. Still, analysts highlight that remittances alone cannot close the external financing gap, particularly when debt repayments and investment outflows remain high.

Pakistan's financial account deficit stood at $245 million in August, bringing the two-month tally to $563 million. Net FDI outflows amounted to $142 million in August, reflecting a 13% year-on-year drop, while cumulative outflows in FY26 so far stand at $323 million, down from $487 million in FY25. This weakening trend in investment inflows is a red flag, as the country increasingly relies on external borrowing to meet financing needs. While loan disbursements helped meet obligations, amortisation payments remained high, keeping net borrowing modest.