Déjà Vu for the trade balance

With a modest recovery in the economy, imports are rising. According to PBS data (shipment basis), monthly imports have consistently remained above $5 billion since April 2025, after staying below that mark from December 2022 to March 2025.

The figure hovered slightly above $5 billion between April and August 2025, before jumping sharply to $5.8 billion in September — the highest since August 2022.

Higher imports, in themselves, are not a concern; they naturally rise with economic recovery. The problem is stagnant exports, which have widened the trade deficit to $3.3 billion in September — also the highest since August 2022.

Export levels remain roughly unchanged from FY22, meaning any significant uptick in imports risks triggering another balance of payments crisis.

Although detailed data for September are yet to be published, recent trends indicate that non-oil imports are driving the surge. Meanwhile, oil imports are relatively lower than in FY22, when global commodity prices were elevated due to the post-COVID reopening and Ukraine war.

Pakistan’s GDP growth stood at 5–6 percent in FY21 and FY22 before nosediving in FY23. In FY25, it was a meager 2.5 percent and is expected to stay below 4 percent in FY26. What should worry policymakers is that even with low economic growth and softer international prices, the trade deficit is slipping out of control for an import-dependent economy.

The September increase appears mainly in non-oil imports. Some of this could be linked to defense-related inflows that have gradually risen since the skirmish with India in May, or possibly to delayed shipments arriving together.

Interestingly, there was no extraordinary payment pressure in the interbank market during September. Interbank settlements, reported by the SBP (often with a lag), did not show unusual strain. If the higher imports were defense-related, the impact on the interbank market may appear later, given that such payments typically face longer lags than regular imports.

If that’s not the case, the interbank market could come under pressure in the coming weeks. Conversations with treasury officials at several banks suggest there was no abnormal import-related demand in September.

However, they did note rising general payment pressures in recent months and observed that SBP’s dollar purchases from the market have declined sharply (latest data pending).

Another reason for the manageable pressure could be continued forward bookings by exporters, which may normalize in a couple of months as the seasonal agricultural export cycle ends. The more pressing issue, however, is stagnant exports — a persistent concern.

As for remittances, the phase of supernormal growth appears over. Inflows are stabilizing, with banking sources indicating levels similar to the previous two months. Banks have also reduced the incentives they once offered, becoming reluctant to pay premiums.

Moreover, there are reports that the IMF has taken note of such premiums, which effectively create dual exchange rates in the interbank market.

The bottom line: neither the SBP nor the government can rely on remittances to finance rising imports. Either imports must be managed at sustainable levels, or exports must grow meaningfully.

Otherwise, the current account deficit will widen — forcing reliance on financial and capital inflows, essentially geopolitical rents. In their absence, growth will remain elusive, and the currency will eventually have to adjust.