The balance of payments

The SBP has released recently the statistics on the external balance of payments of Pakistan, both on an annual and on a quarterly basis, for 2025-26.

The good news is that Pakistan achieved a balance of payments surplus in 2025-26. However, it was a relatively small magnitude of USD 1.8 billion. This was less than half the surplus of USD 3.7 billion achieved in 2024-25.

There are two components of the balance of payments. These are respectively the current account and the financial account. The former account turned marginally negative in 2025-26, from a surplus of USD 1.8 billion in 2024-25. The financial account closed with a surplus of USD 1.2 billion, only marginally smaller than the magnitude in 2024-25.

The quarterly figures of the balance of payments also enable an analysis of what happened in the fourth quarter of 2025-26 in the aftermath of the onset of the Middle East war in late February 2026.

Contrary perhaps to expectations, Pakistan’s balance of payments held up well in the fourth quarter of 2025-26. They approached a surplus of USD 905 million, as compared to USD 365 million in the third quarter.

We proceed now to examine the various transactions within the two accounts of the balance of payments. The deficit of trade in goods rose substantially by almost 25 percent, from USD 26.9 billion in 2024-25 to USD 33.6 billion in 2025-26.

There were negative developments on both fronts. Exports declined by almost 5 percent, while imports of goods rose by over 9 percent. The negative impact of the Middle East war is visible here. The fourth quarter witnessed an increase in the trade deficit in goods by as much as 36 percent. This primarily reflects the rise in the imports of petroleum products and crude oil.

Fortunately, perhaps surprisingly, this was partly neutralized by a jump in workers’ remittances by 7 percent in the fourth quarter and over 8 percent during the year. It is too early to assess if this was a genuine increase or we are beginning to see lump sum transfers by Pakistani workers returning from the Middle East, especially from Dubai, after the commencement of the war.

There have been only marginal absolute changes in the net balance of trade in services and in the balance of net primary income. The two components of primary income are interest payments on external debt and the repatriation of profits by foreign investment entities in Pakistan. The latter has probably declined significantly following the exit from Pakistan of a number of large foreign companies.

Linked to the exit of foreign companies, reflecting negative perceptions of the Pakistan economy and security, we also see a big fall in foreign direct investment in Pakistan. It has declined from USD 2.5 billion in 2024-25 to USD 1.9 billion in 2025-26, representing thereby a big fall of 24 percent.

The general government account has shown a positive trend with an increase in net inflow of USD 2.9 billion. The development is that the net inflow has become larger after debt servicing due to a 22 percent increase in the gross inflow. However, it is not clear if changes in time deposits are included in this account.

As highlighted earlier, the overall position of the balance of payments suffered because of the worsening of the current account, but there was still a significant surplus partly enhanced by an increase in net inflow from the IMF Programme.

Overall, foreign exchange reserves have increased by USD 3.6 billion in 2025-26 as compared to the increase of USD 5.2 billion in 2024-25.

There is the need to recognize the success in stabilization of the balance of payments since 2022-23, when Pakistan came perilously close to default. The outcome of the balance of payments has been positive since then and foreign exchange reserves have increased by USD 5.5 billion in 2023-24, by USD 5.1 billion in 2024-25 and by USD 3.8 billion in 2025-26.

Consequently, foreign exchange reserves have reached USD 18.4 billion at the end of 2025-26. These reserves provide import cover for almost three months and can be considered a ‘safe’ level.

Thanks are due to the IMF for having bailed out Pakistan first with a one-year Stand-by Facility and then with an over three-year Extended Fund Facility. The gross loan inflow from the IMF in these two facilities will add up to over USD 8 billion by the end of 2026-27, if Pakistan continues to perform well in the on-going Programme.

We need to look at the projections for the balance of payments in 2026-27 of Pakistan by the IMF. These projections were made on May 14, 2026 after the successful completion of the third Programme review by Pakistan. Therefore, they have been prepared at the time of the on-going war in the Middle East and in the presence of a quantum jump in oil prices.

The IMF projections of the balance of payments for 2026-27 include a quantum jump in the current account deficit to over USD 4 billion. However, the positive expectation is that the rise in goods imports will be largely neutralized by a big increase in goods exports.

A perhaps surprising expectation of the IMF is that workers’ remittances will fall in 2026-27. This probably reflects the exit of some Pakistani workers, especially from Dubai.

However, turning to the financial account, the projection is that the inflow into this account will rise significantly by over USD 3 billion. This is anticipated due to a significant increase in foreign private investment and other inflows.

The IMF expects, including its own loan disbursement, for the reserves of Pakistan to rise further by USD 3.4 billion in 2026-27. This will raise the level of these reserves to almost USD 21 billion, well above the import cover of three months. Pakistan can then proceed without an IMF umbrella after 2026-27.

However, the IMF projections are now unduly optimistic, especially with the recent intensification of the war between the USA and Iran. There is now a risk that the Strait of Hormuz will remain closed. Also, the access via the Red Sea may also be stopped. This raises the risk of a quantum jump in the oil prices internationally.

Consequently, the authorities in Pakistan must be more cautious about the prospects in 2026-27. There is the risk of a quantum jump in the oil import bill, big decline in home remittances and reduction globally in exports due to a world-wide recession. These negative developments could put strong pressure on the foreign exchange reserves.

Copyright Business Recorder, 2026