Rising remittances, falling exports

Pakistan needs to turn inflows into productive investment and jobs

ISLAMABAD:

Pakistan is receiving more dollars from overseas Pakistanis while earning less at home, slowing momentum from its own productive economy. This is the paradox confronting policymakers: remittances are rising strongly, but exports are struggling to maintain their pace, trade deficit is widening, foreign direct investment remains weak and domestic investment is insufficient to create jobs for a rapidly growing young population.

The latest remittance figures are certainly encouraging. Workers' remittances reached $3.66 billion in August 2026, up 16.5% year-on-year and 0.7% from July. During the first two months of FY2027, remittance inflows stood at $7.29 billion, an increase of 14.7% over the corresponding period, compared with exports in the same period at $5.46 billion.

Trade deficit surged in the current fiscal year's first two months (July-August) by 18% year-on-year to $7.12 billion from $6.01 billion in the same period of last fiscal year. Pakistan received a record $41.6 billion in remittances in the last fiscal year 2026, which cushioned the current account deficit to remain within the comfort zone of $139 million despite a huge trade deficit of $39.5 billion.

The State Bank's latest data shows total liquid foreign exchange reserves of around $21.72 billion as of September 4, providing a significantly better cushion than Pakistan had in recent years. But there is a question we must ask: how long can Pakistan continue relying on its brothers, sisters, cousins' remittances and friendly countries to finance its consumption? Remittances are the generosity and hard-earned income of Pakistan's diaspora. They are a valuable external-sector asset, but they cannot become a permanent substitute for exports, investment and productivity.

Saudi Arabia remains the largest source of remittances, while inflows from the UAE, UK, EU and US are also growing. The stronger performance of the UK and Europe is particularly encouraging because it provides some diversification beyond the traditional Gulf countries. Yet the fundamental weakness remains: Pakistan is earning too few dollars through producing and selling competitively to the world.

Exports are losing momentum

The warning is visible in the trade numbers. During the first two months of FY2027, Pakistan's trade deficit widened by 18% to $7.12 billion, from $6.01 billion in the same period of last year. Exports amounted to about $2.96 billion in July but fell to approximately $2.51 billion in August, a monthly decline of around 15%. Although exports during July-August reached $5.46 billion, up 7% year-on-year, the monthly loss of momentum is concerning at a time when imports are rising faster.

The issue is not simply that exporters need another subsidy. Pakistan's production structure itself has become increasingly uncompetitive. High energy prices, taxation, financing costs, logistics charges, port inefficiencies and expensive domestic inputs are squeezing exporters' margins. Our economy has become increasingly consumption-oriented without generating sufficient productive surplus. A country cannot permanently consume more than it produces and expect remittances to fill the gap.

We do not fundamentally have a revenue problem. The Federal Board of Revenue collects significantly more each year. We have a spending problem. The government's expenditure continues to rise, while the tax burden on the existing formal economy becomes heavier. Even an ordinary Pakistani household with electricity and gas connections can face substantial withholding taxes, regardless of whether the individual is actually liable to pay income tax. This broad-based extraction increases the cost of survival and, for companies, the cost of doing business, reducing disposable income without necessarily expanding the productive tax base.

The Middle East shock

The prolonged US-Iran conflict and disruptions in the Red Sea and the Strait of Hormuz have added another layer of risk. Brent crude has crossed $100 a barrel amid escalating attacks and supply concerns. Shipping through the Strait of Hormuz and the Red Sea has also fallen dramatically. Recent vessel traffic was reported at only a fraction of pre-war levels, threatening energy and commodity supply chains.

For Pakistan, the greatest danger is not necessarily an immediate balance-of-payments crisis. It is that an external energy shock could derail the fragile economic recovery just as it is beginning. At sustained crude oil prices of $90-100 or above, the arithmetic changes. The import bill rises, inflationary pressures intensify, interest-rate cuts may be delayed or reversed and economic growth could weaken further.

Pakistan's reserves and a relatively stable exchange rate can absorb a temporary shock. They cannot indefinitely absorb a prolonged combination of expensive oil, costly LNG, higher freight, shipping insurance and weak exports. The reported increase in container freight to Gulf destinations – from a few hundred dollars to several thousand dollars for a 20-foot container – is especially damaging for low-margin commodity exporters.

Subsidies are not the answer

The traditional response would be to demand export rebates, freight subsidies or another DLTL scheme. This would be the wrong response; it would subsidise foreign consumers and inflate domestic prices. Pakistan has little fiscal space for rent-seeking incentives that reward exporters regardless of underlying competitiveness. Cash incentives ultimately subsidise foreign consumers while encouraging domestic price distortions and hoarding.

The answer must instead be to lower the cost of production and logistics for everyone. Federal and provincial governments should undertake an aggressive reduction in non-development expenditures and reconsider the sequencing of lower-priority long-term development projects. The fiscal space created should be redirected towards reducing the cost of energy, taxation and logistics for export-oriented industries.

At the farm level, provinces should directly support growers through targeted inputs assistance for fertiliser, seed, diesel and pesticides rather than allowing high production costs to destroy the competitiveness of agricultural exports. A bumper crop should never become a liability because farmers cannot produce at internationally competitive prices.

Build the infrastructure of competitiveness

Leading exporting countries provide three basic logistics advantages that Pakistan still lacks. First, efficient ports: competitive handling and port charges, and swift customs clearance. Second, modern storage: adequate warehousing, cold chains, silos and temperature-controlled logistics to reduce post-harvest losses and prevent forced selling or hoarding. Third, multimodal transport: efficient railway cargo, waterways where feasible and competitive road freight with rational toll structures.

These are not subsidies. They are investments in national competitiveness. Pakistan also needs predictable taxation, cheaper and reliable energy, lower financing costs, trade facilitation and consistent long-term policies. Exporters should compete because Pakistan is efficient – not because the government writes them a cheque.

The ultimate objective should be to transform remittances from a consumption cushion into a bridge towards investment. The government and financial sector should create credible, transparent instruments through which overseas Pakistanis can invest in export-oriented manufacturing, logistics, agribusiness, technology, housing and infrastructure without bureaucratic uncertainty.

Remittances should continue to flow through formal channels, but Pakistan must gradually convert a portion of diaspora wealth into productive capital that creates jobs and earns future dollars. The real measure of economic success is not how much money Pakistanis abroad send home. It is whether Pakistan can increasingly earn enough itself.

Remittances can protect us from a crisis. Exports, investment and productivity are what can build a prosperous economy. Pakistan must therefore stop celebrating rising remittances as though they were a substitute for economic reform. They are a blessing – but exports are a necessity.

THE WRITER IS A FORMER VICE PRESIDENT OF KCCI, FORMER BOARD MEMBER OF REAP AND AN INTERNATIONAL TRADE EXPERT