Pakistan's external sector stays resilient in FY2026 despite Middle East shock

June 11, 2026 (MLN): Pakistan's balance of payments-maintained stability during July-March FY2026, supported by strong remittance inflows and growing IT exports, though a Middle East crisis in late February 2026 disrupted trade flows and pushed the current account into deficit in April.

Current account posts surplus before crisis hit

Pakistan's external account recorded a current account surplus of $72m during July-March FY2026, supported by workers' remittances growth of 8.2% to $30.3bn, a narrowing primary income deficit due to lower interest payments on external debt, and a 17.2% surge in services exports.

Goods exports, however, declined 5.8 percent to $22.7bn, weighed by a 33.9% fall in food exports primarily rice amid normalisation of global rice supplies, weak external demand, and disruptions to Pak-Afghan trade since mid-October 2025.

Imports rose 7.8%, driven by stronger demand for production-related inputs as domestic economic activity improved.

Middle East crisis turns account into Deficit

The onset of the Middle East crisis following the US-Iran conflict in late February 2026 reversed the positive trend. Brent crude surged from an average of $62.7 per barrel in December 2025 to $103.7 per barrel in March 2026.

Suspension of shipments to key markets, closure of a land transit route, and higher freight costs pushed the current account into a deficit of $324m in April 2026 though it remained within manageable limits.

Merchandise trade: Deficit widens to $27.9bn

The merchandise trade deficit widened to $27.9bn during July-March FY2026, against $22.7bn in the same period last year.

Exports stood at $22.7bn versus $24.7bn last year. The textile sector contributing 59.6% of total exports at $13.5bn remained broadly stable with a marginal 0.5% decline.

Readymade garments rose 3.8% to$3.2bn while knitwear dipped 1.1%. Food exports fell sharply to $3.8bn, a 33.9% decline, with rice exports alone contracting 38.6%.

Petroleum exports, though modest at 2.58% of total, surged 37.5% to $586m, driven by enhanced domestic refining capacity and rising global demand.

Imports increased 6.9% $50.7bn. The transport group surged 82.8% to $2.9bn, driven by a doubling of motor car parts imports to $1.5bn following easing of import restrictions.

Machinery imports rose 10.3% to $7.9bn, led by a 27.3 jump in telecom machinery. Food imports climbed 15.2% to $7.1bn on higher palm oil prices.

Petroleum imports, however, declined 5.9% to $11.2bn, helped by lower LNG demand and increased solar power contribution.

IT sector drives services surplus narrowing

The services trade deficit narrowed 10.4% to $2.1bn. Services exports grew 17.2% to $7.4bn, with IT exports alone jumping 19.8% to $3.4bn accounting for 46.1% of total services exports and surpassing readymade garments in value.

Other business services rose 27.7% to $1.6bn, largely driven by a threefold increase in freelance technical services.

Remittances exceed goods export receipts

Workers' remittances rose 8.2%to $30.3bn during July-March FY2026, exceeding goods export receipts for the period.

Saudi Arabia and the UAE remained the anchor sources, while inflows from the European Union particularly Italy, Spain, and Ireland registered notable growth, pointing to a gradual diversification of remittance sources.

FDI moderates; Capital market milestones achieved

Net FDI stood at $1.4bn, down from $1.9bn last year, mainly due to a one-off telecom-sector divestment of $465.5m by a Norway-based company.

Excluding this, underlying inflows remained concentrated in power and financial services sectors. China led with $678.6m in net FDI inflows.

On the capital markets front, Pakistan raised $750m through a three-year Eurobond and completed its inaugural Panda Bond issuance in China's onshore market, raising RMB1.75bn (approximately $250m), broadening access to non-dollar financing sources.

Reserves surge; PKR stays stable

Total foreign exchange reserves reached $21.8bn by end-March 2026, up $6.8bn from $15.0bn a year earlier.

SBP reserves stood at $16.4bn while commercial banks held $5.4bn. The exchange rate remained stable at an average PKR279.5 per US dollar in March 2026, a marginal 0.2% appreciation year-on-year.

Pakistan's credit ratings were upgraded by Fitch (CCC+ to B-), Moody's (Caa2 to Caa1), and S&P (CCC+ to B-) during the period, bolstering investor confidence.

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