Pakistan’s economy has experienced a temporary setback with a current account deficit of $420 million in January, following five consecutive months of surplus from August to December. This reversal highlights the ongoing pressure of debt repayments and rising imports on the country’s balance-of-payments position. While the deficit is concerning, it remains manageable, especially in light of robust remittance inflows from overseas Pakistanis, which have surged by $5 billion between July and January compared to the previous year.
Despite the January gap reducing the accumulated current account surplus from $1.2 billion to $628 million, the situation is still a marked improvement over last year’s $1.8 billion deficit for the same period. Analysts expect the current account balance to fluctuate within a narrow range of +0.5% to -0.5% of GDP during the fiscal year 2025. However, the country faces significant external financing challenges due to a 38% decline in foreign loan inflows, which fell to $4.58 billion in the first seven months of the current fiscal year from $6.31 billion a year ago. Notably, these figures do not include the $1 billion received from the International Monetary Fund (IMF) under its ongoing funding program.
While the government aims to secure $19.4 billion in external financing, including $9 billion from China and Saudi Arabia, the delay in promised Gulf investments remains a major concern. Foreign direct investment (FDI) has increased by 27% to $1.3 billion in the first half of the fiscal year, but this figure remains too low to drive meaningful economic transformation. Investor confidence is still hampered by slow structural reforms, regulatory bottlenecks, and political uncertainty.
The country’s financial account remains weak, with a trade gap exceeding $16 billion, largely being financed through the current account. This imbalance has contributed to a $1 billion decline in the State Bank’s foreign exchange reserves over the past eight weeks, despite market purchases amounting to $3.8 billion in July-October. While some analysts have raised concerns about further financial deterioration, the pressure from debt repayments is expected to ease as major loan maturities have been settled, and import demand is likely to cool.
Pakistan must shift away from its reliance on remittances to cover external deficits and instead focus on attracting sustainable, non-debt-creating foreign investment. The current economic stability, aided by controlled inflation, potential interest rate cuts, and a steady exchange rate, offers policymakers a brief window to implement critical investment and structural reforms. Failure to act swiftly could result in yet another cycle of economic vulnerability.
