The figures on the balance of payments for Pakistan for the first quarter of 2025-26 have been released recently by the SBP (State Bank of Pakistan).
The numbers are somewhat contrary to the perception that there is a high degree of stabilization in external transactions of Pakistan.
The previous year, 2024-25, had, in fact, witnessed a positive balance in the current account after a long time. This had contributed to a big build-up of foreign exchange reserves of USD 5.1 billion to a relatively high level of USD 14.6 billion. This was enough to provide import cover for 2.5 months.
A comparison of the outcome in the balance of payments in the first quarter of 2025-26 with that in the corresponding quarter of 2024-25 and with the previous quarter of April to June 2024-25 reveals a somewhat different picture.
The first indicator used for the comparison between quarters is the size of the balance in the current account. It has turned negative to USD 594 million in July to September 2025 as compared to a surplus of USD 177 million in the previous quarter.
Further, while there was also a deficit in the first quarter of 2024-25, it was over 18 percent lower than the deficit in the corresponding quarter of 2025-26.
The bottom-line comparison is with the change in the position of the level of foreign exchange reserves. They have actually fallen by USD 274 million in the first quarter of 2025-26.
There was a significant increase in foreign exchange reserves of USD 1,236 million in the first quarter of 2024-25 and as much USD 3,901 million in the previous quarter of April to June 2025. Clearly, this is a reversal of the positive trend in 2024-25 when over the year reserves rose by USD 5.1 billion.
The basic question is what factors explain the visible weakening of the balance of payments position in the first quarter of 2025-26?
There is need first for analysis of the transformation of the current account balance from a positive magnitude of USD 177 million in the fourth quarter of 2024-25 to a big deficit of USD 594 million in the succeeding first quarter of 2025-26.
The transformation has already raised serious doubts about the validity to the projection by the IMF that the annual current deficit in 2025-26 will be USD 1.5 billion. This projection was made in May 2025, much before the impact of floods.
The main contribution to the worsening of the current account position with respect to the previous quarter is a significant decline in workers’ remittances by over 7 percent. Overall, the balance in secondary income of the current account has worsened by almost USD 1 billion, with over 77 percent due to a fall in workers’ remittances.
The concern is that the large-scale pre-emption of remittances by the SBP for the first time in 2024-25 leading to a quantum jump of USD 8 billion may now be seeing some leakages. Otherwise, there is no clear reason for the drop in remittances.
There is one positive outcome. While exports have shown a moderate growth rate of 3.4 percent, imports have declined by 2 percent in relation to the level of the previous quarter. The rupee has remained nominally stable and is unlikely to have exerted any negative impact on imports. It is possible that international prices are beginning to slide down as has been visible in the case of oil prices.
There is the opposite outcome in the import of services. They have grown by 19.1 percent in relation to the level in the previous quarter and by 11.2 percent in comparison to the imports in the corresponding quarter of 2024-25. Reasons for this big jump will also need to be identified.
Turning to the financial account of the balance of payments, there is need to also examine some negative developments also in this account.
The first major negative outcome is a big fall of 45 percent in foreign direct investment in relation to the July to September outcome in 2024-25. There has been considerable optimism about big increases in these inflows, which have not happened yet. On the contrary, however, there is now even the process of exit of some major multinational companies from Pakistan.
The other apparent contradiction is the big quantum of exit of portfolio funds. They were a positive USD 143 million in the first quarter of 2024-25, but there has been a big outflow of USD 630 million in the first quarter of 2025-26. This is happening despite the apparent boom in the domestic stock market.
A mixed pattern is observed of the inflow of funds into the government account, mostly in the form of medium- to long-term loans.
The positive development is the transformation from a negative inflow, due to higher amortization payments, of USD 573 million in the first quarter of 2024-25, to a positive net inflow of USD 359 million in the first quarter of 2025-26.
However, this is much less than the net inflow of as much as USD 2,397 million in the previous quarter of April to June 2024-25.
Overall, as highlighted earlier, we have seen a negative current account deficit in the first quarter of 2025-26.
The situation is likely to worsen further with the negative impact of the floods over the remainder of 2025-26. The likelihood is that exports will be reduced by lower exports of rice, while imports will rise due higher cotton and wheat imports. The overall level of textile exports may also be negatively impacted because of shortage in the domestic availability of cotton.
The IMF Programme’s target for the size of the current account deficit of USD 1.5 billion and increase in foreign exchange reserves of USD 3.8 billion in 2025-26 look optimistic now. There will be need for more stabilization measures, including a reduction in the Real Effective Exchange Rate (REER) of the rupee, which has risen to above 100.
We also await the balance of payments projections for 2025-26 by the IMF after the successful completion of the second review. How the external financing requirements will be met in the presence of a larger current account deficit will be of great importance.
Copyright Business Recorder, 2025
The writer is Professor Emeritus at BNU and former Federal Minister