Widening trade deficit

EDITORIAL: Data released by the Pakistan Bureau of Statistics (PBS) for July-August 2026 against the same period the year before revealed a widening of the trade deficit – from negative 6.025 billion dollars to negative 7.116 billion dollars, a rise of 18.11 percent.

Exports rose by 7.04 percent between July-August 2026 against the same period in 2025 while imports rose by 13.03 percent.

Three observations are critical for an informed analysis. First, details of which items contributed to a rise in exports are available for July this year but not for August with the July data indicating that the major rise in exports was in textiles and textile articles (with a decline in raw cotton exports and the largest contributor being apparel, clothing and knitted items) followed by base metals; mainly, copper and aluminum and tools, implements, and cutlery.

Secondly, the rise is cited in dollar terms (value) rather than in volume so the obvious assumption is that the price of exports in the international market has increased – a rise that is easily explained by woeful curtailment of shipping in the Strait of Hormuz as a result of the ongoing Middle East conflict. This led to the use of air, a more expensive form of transport, to export, which led to a rise in the value of the items though, perhaps, not higher volume.

And finally, imports of petroleum and products that one would have assumed have risen in value considerably due to the conflict declined in July this year to 1.198 billion dollars against 1.655 billion dollars in July 2025. This may lead one to conclude that the government may have reduced its imports, as has been evident in other countries, including China. If this is indeed the case, then one can assume that the productive sectors may be forced to cut back that, in turn, would lead to a decline in Gross Domestic Product (GDP) growth rate that accounts for a rise in employment as well as a reduction in inflation.

In other words, this scenario would have serious negative repercussions on the quality of life of the general public.

What is, however, unclear from only the July data is whether the government, through structural reforms, has broken the vicious cycle of a widening current account deficit that has compelled successive governments to impose administrative measures curtailing imports as well as seeking an International Monetary Fund programme loan, which, in turn, throttles export revenue as productive sectors reliant on raw material and/or semi-finished product imports as inputs are forced to drastically reduce, if not cease, output.

Pakistan cannot be held accountable for the geopolitical crisis brought on by the US-Israel attack on Iran on 28 February this year, with severe negative repercussions on the world economy, including Pakistan, to this day, but what Pakistan can do is to undertake reforms that would end this vicious cycle once and for all. It is therefore critical for the government to encourage development of those industries that export not the surplus as is the case of most of our export items today, barring IT exports, but produce to export as is the case in other countries embarked on the road to reaching the take-off stage.

In sum, if the government must focus on ending the vicious cycle with the objective of reaching a trade surplus that would go a long way in not only reducing the need for the government to extend subsidies to existing industries that, as correctly noted by the Fund, have retained the status of ‘infant’ even after decades of fiscal and monetary incentives but also slowly but surely reduce Pakistan’s dependence on borrowing.

Copyright Business Recorder, 2026