Pakistan’s return to a current account deficit in the first half of FY26 serves less as an immediate crisis and more as a reminder of the economy’s underlying vulnerabilities. The current account swung to a $1.17 billion deficit in July–December, down from a $957 million surplus in the same period last year and a $2 billion surplus for the full year. While the deficit remains within the FY26 target of $2.1 billion, or 0–1% of GDP, it signals how sensitive the external balance is once economic growth resumes.
The widening trade gap — rising from $14.5 billion to $19.2 billion — remains the primary driver. This occurred despite compressed domestic demand, highlighting the structural challenges facing policymakers and the State Bank. Weak foreign private and official flows, alongside disruptions such as the Afghan border closure, have compounded the issue. Immediate triggers include a surge in food imports and a drop in rice exports, but the broader problem points to deeper structural deficiencies in agriculture, industry, and investment.
Remittances and lower global oil prices have provided some relief, stabilising the external account and supporting foreign exchange market sentiment. Yet these cushions remain fragile. Geopolitical risks, particularly tensions in the Middle East, could quickly undermine these gains. The recent shift back to a deficit has already strained market confidence, raising the possibility of renewed pressure on the rupee and potential intervention by the State Bank. This could also stall the monetary easing recently resumed after months of tightening.
It is important to note that a current account deficit is a symptom rather than the root problem. The underlying causes lie in falling agricultural and industrial productivity, subdued exports, and policy barriers that discourage foreign investment. Recent data confirms that both exports and long-term, non-debt-creating foreign inflows are contracting.
Prime Minister Shehbaz Sharif has convened an inter-ministerial committee to formulate a strategy for exiting the IMF programme. To be effective, this plan must address structural weaknesses across agriculture, manufacturing, and investment. Sustainable growth — anchored in productivity, export competitiveness, and reliable investment inflows — is essential to prevent recurring balance-of-payments shocks and reduce the economy’s vulnerability to external pressures.
