The C/A worries

EDITORIAL: The current account (C/A) is slowly coming under pressure, as international petroleum prices remain persistently high, putting upward pressure on imports.

Exports are not growing at the required pace while the trade deficit is widening. Remittance growth is likely to be checked this year, and that may challenge the stability of the PKR. REER (real effective exchange rate) is already hovering higher, suggesting an equilibrium value close to Rs300/USD.

The current account posted a deficit of $328 million in July 2026, which is a better number relative to the previous month and the same month last year. The issue is that despite slowing pace of LSM growth (evident from June’s published figures) imports have crossed the $6 billion mark. Goods’ exports are standing at half that level, resulting in a goods trade deficit of $3.1 billion—17 percent higher year-on-year.

The services balance keeps improving due to better performance in services exports—Information Communication Technology (ICT) and other business services; it is partially due to the taxation advantage, with a 30 percent-plus delta for workers to move from the formal domestic sector to services rendered abroad. It maintained its higher momentum in July, with technology exports up by 18 percent to $417 million.

The combined goods and services deficit worsened by 27 percent to $3.4 billion and adding the primary balance, the total deficit stands at $4.2 billion. It is hard for remittances to keep catching up, as the total stood at $3.6 billion—hence, we have a current account deficit.

More than half of the remittances are coming from the Gulf region, where turmoil is growing due to the Iran-US war and the risks of an economic slowdown are real. Plus, the same heightened risk is keeping oil prices and the import bill high. It is creeping up inflation as well, which is likely to remain in double digits over the next two months. Overall, these developments have slowed the economic growth momentum that was building before the war.

The challenge is back to maintaining stability. Fiscal performance is good, with debt-servicing costs declining significantly. The key is to improve the trade balance through a combination of curtailing imports and boosting exports.

So far, the central bank (SBP) has been using one policy tool to curb demand by keeping real positive rates at 2-3 percent or more, which has kept upward pressure on the fiscal side to generate more revenues to service debt. A better strategy could be to let the PKR depreciate slightly; which would not only curb import demand but also have a positive impact on exports. Plus, that might give room to keep real rates less positive.

The argument gains weight by looking at the way REER is moving. It has now reached uncomfortable levels—in July, it stood at 107.92, which is the highest since May 2018. REER was at 100.0 in July 2025. It is appreciating sharply and is likely to rise further in August and September due to higher expected inflation.

The SBP should not let the currency slip onto a dangerous path where the eventuality is steep currency depreciation—the economy has experienced this behaviour numerous times in the past.

However, the SBP could counter-argue by pointing to its aggressive buying from the interbank market and the build-up of reserves. These are fine, but a prudent move could be to read the signs and move gradually before the panic button has to be hit.

Copyright Business Recorder, 2026