C/A slips into $594m deficit in Q1 of FY26

Pakistan's current account recorded a deficit of $594 million for the first quarter of FY26 (July-September 2025), reversing a small surplus of $110 million in August, as rising imports outpaced gains in exports and remittances, according to provisional data released by the State Bank of Pakistan (SBP) on Monday.

The deficit reflects a growing import bill amid moderate export growth. Exports of goods rose modestly to $7.9 billion during the quarter, up from $7.4 billion a year earlier - a growth of about 6.5%. However, imports surged faster to $15.4 billion, up 8.3% year-on-year, widening the goods trade deficit to $7.53 billion for the quarter.

Service exports grew by 15% to $2.2 billion, but this was offset by higher service imports of $3.1 billion, leaving a $931 million deficit in the services balance. Among the service sector, Pakistan recorded its highest-ever monthly IT exports.

"IT exports have made a new high of $366 million (up 25% YoY), and contribution to total goods and services exports has also reached a high of 10.7% (+1.8 ppts YoY) in September 2025," said Maaz Azam, Research Head at Optimus Capital.

Pakistan recorded its highest-ever monthly IT exports of $366 million in September 2025, up 25% year-on-year and 9% month-on-month. These exports were higher than the last 12-month average of $326 million. This took first-quarter FY26 IT exports to $1.06 billion, marking a 21% year-on-year increase. Average daily export proceeds stood at $16.64 million in September 2025 versus $14.65 million in August 2025.

Topline Securities' analyst Sania Irfan noted that year-on-year growth in IT exports was driven by four factors: (1) expansion of IT companies' global client base, especially in the Gulf Cooperation Council (GCC) region; (2) the SBP's decision to raise the permissible retention limit from 35% to 50% in exporters' specialised foreign currency accounts; (3) permission for equity investment abroad through these accounts; and (4) exchange rate stability encouraging higher repatriation of profits.

According to a survey by the Pakistan Software Houses Association (P@SHA), 62% of IT firms now maintain specialised foreign currency accounts. "In our view, the SBP's Equity Investment Abroad (EIA) policy – allowing exporters to acquire foreign interests using up to 50% of proceeds – will further strengthen confidence and remittances in the sector," she said.

Net IT exports (exports minus imports) stood at $330 million, up 29% year-on-year and 8% month-on-month, exceeding the 12-month average of $286 million. While the government has set an FY26 target of $5 billion, Topline expects IT exports to grow by 18-20% this fiscal year. Under the "Uraan Pakistan" economic plan, the FY2029 export target of $10 billion implies a compound annual growth rate (CAGR) of 27%. Within the sector, Systems Limited (SYS) remains a preferred pick, trading at 2025E and 2026F price-to-earnings (P/E) multiples of 21.6x and 16.1x, respectively.

Meanwhile, workers' remittances showed encouraging momentum, rising to $9.54 billion in July-September FY26, compared to $8.8 billion in the same period last year – a growth of 8.4% as inflows from Gulf countries and the US strengthened.

Pakistan recorded a net foreign direct investment (FDI) inflow of $186 million in September 2025, slightly higher than $175 million in August. However, quarterly inflows remained subdued, according to Arif Habib Limited (AHL). During the first quarter of FY26, net FDI inflows declined by 34% year-on-year to $569 million, compared to $865 million in the same period of FY25.

Overall, Pakistan's net borrowing position worsened as the balance from current and capital accounts slipped to a deficit of $562 million for the month.

The SBP's reserves excluding banks rose to $14.28 billion by end-September, up sharply from $10.84 billion at the close of FY25, while total gross reserves (including banks) reached $15.49 billion.

Pakistan's external account faces renewed pressure as the current account deficit widened, driven by rising imports, weak export competitiveness, and higher income outflows. Despite robust remittances, the goods trade gap remains elevated at over $7.5 billion in 1QFY26, reflecting persistent import dependence.

Foreign direct investment remains modest, while oil prices and demand recovery continue to strain the import bill. Sustaining reserves near $14.3 billion will hinge on International Monetary Fund inflows and policy discipline, as structural issues, including low productivity, narrow export base, and sluggish private investment, pose significant medium-term challenges.