BR RESEARCH: Current account: Stability holding, risks building

The current account has slipped back into deficit—coming in at $112 million in October, compared to a surplus of $83 million in the previous month. In 4MFY26, the current account deficit reached $733 million versus $206 million in the same period last year, an increase of 256 percent.

The slippage is smaller than anticipated based on shipment data (PBS imports), which recorded $6 billion in imports, while SBP’s payment-based data shows $5.3 billion. The gap between shipment and payment data has been unusually high so far, this fiscal year.

In 4MFY26, the goods-import delta between PBS and SBP data stands at 10 percent, or $2,309 million. This is significantly above the ten-year average of 5 percent, or $921 million. A PBS figure 4–6 percent higher than SBP is normal because PBS includes freight charges, which SBP classifies under services imports.

Any larger gap raises concerns. Historically, whenever the delta widened, a balance-of-payments crisis followed—for example, the gap was 13 percent and 8 percent in 4MFY17 and 4MFY18, respectively, preceding the FY19 crisis. The delta again stood at 9 percent in 4MFY22, and the macro turbulence of 2022–23 is still fresh. This pattern suggests FY27 could be a challenging year for managing the external account.

The import delta is spread across categories. Based on 1QFY26 detailed data, the variation is 21 percent in food imports—mainly palm oil and other staples—31 percent in transportation (driven by CBU car imports), and 30 percent in textiles. Importers appear to be increasingly relying on deferred payment commitments, and eventually the “chickens will come home to roost.”

The real issue is that imports are rising—despite weak economic growth and low international oil prices—while exports are stagnating due to falling demand (partly because of US tariffs) and declining competitiveness in energy pricing and taxation. Remittances growth has slowed, though it remains sufficient to keep the current account deficit manageable. However, this assumes import payments are being deferred; once they normalize, the current account slippage could become a red flag.

Food imports (SBP) are up 20 percent to $2.6 billion in 4MFY26. Palm oil imports have risen 18 percent, while other food items have surged 37 percent. Sugar imports have also increased notably—$101 million worth was imported versus almost none, last year. Food imports are likely to rise further as wheat imports are expected in the coming months.

Machinery imports have grown by 16 percent, with more than 50 percent growth in office and construction machinery. Transport imports have more than doubled to $1.2 billion in 4MFY26 due to rising car sales and Punjab government bus purchases—CBU bus imports reached $169 million versus just $13 million last year. CBU car imports are up nearly 3x to $45 million, while CKD car imports rose 71 percent to $587 million. Multiple new models (mainly Chinese NEVs) are being launched, adding excitement to the sector. However, once pressure builds, restrictions and taxes typically hit automobiles first.

The one relief is a 5 percent decline in petroleum imports due to lower prices, even as PBS data indicates rising volumes. With global prices soft, petroleum imports should remain under control.

Goods exports remain stagnant—up only 2 percent to $10.6 billion in 4MFY26. Food exports have fallen sharply by 30 percent to $1.5 billion, led by a 39 percent drop in rice exports (to $552 million) and a 48 percent decline in vegetable exports (to $53 million). There have been no sugar exports, compared to $135 million in 4MFY25. Overall, the food trade balance has shifted from a marginal surplus in 4MFY25 to a $1.1 billion deficit.

Textile exports are constrained, rising only 6 percent to $6.2 billion. Growth is stronger in value-added segments—knitwear up 14 percent and readymade garments up 9 percent—while yarn and cloth exports have continued to decline. Textile exports could be higher, but industry sources indicate a marginal shift of textile earnings toward ICT exports to benefit from tax advantages.

This partly explains the strong rise in ICT exports, which reached an all-time high of $386 million in October (up 17 percent). In 4MFY26, ICT exports totalled $1,443 million, up 20 percent. While encouraging, this should be viewed cautiously given that many textile firms are reportedly setting up IT companies and routing small amounts through them to reduce taxes.

Overall, the goods and services trade deficit widened by 17 percent to $11.3 billion, while the primary-income balance remained unchanged at $3.1 billion in 4MFY26. Remittances grew 9 percent to $13.0 billion, but this was not enough to maintain a current account surplus—hence the deficit.

The capital and financial accounts are just about covering the current account deficit, keeping SBP reserves roughly unchanged from the June level of $14.5 billion. FDI continues to decline despite rising commitments—down 38 percent to $640 million in 4MFY26 due to higher profit repatriation.

There is currently calm on the external account, helped by delayed import payments. However, risks are mounting, and the SBP cannot afford further monetary easing given the administration’s preference for a sticky exchange rate.