KARACHI:
Two key developments in recent weeks highlight the predicament facing trade policymakers. First, the rising trade deficit is putting pressure on the already fragile external accounts, driven by a surge in imports and weakening export growth.
Exports in the first four months of FY26 were 4% lower than in the same period of last year, while imports were 16% higher. Given that the recent plans to restructure the economy place strong emphasis on export growth, the decline in export numbers is likely to raise concerns among stakeholders.
The current account deficit, vis-à-vis the rising trade deficit, increased to $733 million in the first four months compared to $206 million in the same period of last fiscal year.
Second, the real effective exchange rate (REER) reached 103.95 in October 2025, up from the revised 101.70 in September 2025. Meanwhile, the nominal exchange rate of the rupee against the US dollar is hovering around 280 with little fluctuation. This trend is reigniting the debate on whether Pakistan is drifting towards another external sector crisis.
To better understand the current situation, it is essential to revisit the intensity of import restrictions imposed in 2022, when the country experienced a typical balance-of-payments trough. Pakistan imported over $80 billion worth of goods in FY2022, while exporting only around $31 billion, creating a massive $49 billion deficit. Remittances, which usually bridge the gap, were insufficient to finance the trade deficit. The current account deficit reached approximately $18 billion in FY2022.
The gap between the trade and current account deficits is bridged mainly by remittances, while inflows of essential foreign exchange, such as foreign direct investment (FDI) remain meagre. The rising trade deficit, therefore, directly shapes the current account position and poses substantial challenges to policymakers.
However, crucial factors contributing to the trade deficit and impending crisis need to be highlighted. First, the composition of imports is critical. In the previous cycle beginning mid-2022, fuel products were the major contributors to the trade deficit. These products typically account for over a quarter of Pakistan’s imports, compared to less than 10% in many East Asian economies.
Their imports, by contrast, are dominated by technology-intensive products that enhance productivity and support economic and human capital development, which are categories far less common in Pakistan’s import basket. Such products tend to be more productive, contributing to economic growth and human capital accumulation.
Second, several import restrictions were introduced in June 2022 to curb demand. Although many were lifted by year-end, the effects on imports and industrial production continued. For instance, measures such as those that delayed financial transactions on imports had lasting consequences, as trade linkages weakened.
Since inputs and machinery are vital for Pakistan’s manufacturing sector, these measures created supply-side challenges, both domestically and in terms of export performance. The Economic Advisory Group (EAG) has produced several data stories on these restrictions, outlining their types, intensity, and cross-country comparisons.
Their analysis shows that Pakistan not only adopted several instruments to reduce imports, ranging from tariffs to non-tariff measures, it imposed them more aggressively than countries more open to trade. In essence, this approach has had serious repercussions, contributing to low economic growth and current economic challenges.
Lastly, it is also important to note that the Pakistani rupee is reported to be overvalued, with reports suggesting the REER rate to be around 104. An overvalued currency favours imports over exports by making the former cheaper for domestic consumers. This desire to hold the rupee at a certain level by restricting dollar purchases can be harmful if it increases speculative risks.
Pakistan has historically struggled to accumulate sufficient reserves to counter speculation, making international trade more volatile as stakeholders position themselves around exchange-rate movements. A desire to maintain a steady nominal exchange rate creates uncertainty for trade and foreign investment, as profit margins requiring currency conversion become vulnerable to exchange-rate risks.
Policymakers must, therefore, curb speculation in the currency market to encourage more stable and sustained growth in international trade.
In summary, the government must continue to improve Pakistan’s international trade linkages. These efforts should go beyond tariff reforms, which are currently guided by the National Tariff Policy 2025-2030, and adopt a holistic approach that includes non-tariff measures and business reforms to enhance participation in international trade.
With one of the lowest trade-openness levels in the region and globally, not only are Pakistani producers prevented from access to major markets, but consumers are also deprived of variety and quality in terms of goods they are able to purchase. This has a detrimental effect on the price range and the quality of the goods available in the country.
Hence, it is crucial to adopt strategies that encourage international trade activities rather than discourage it and impose restrictions on trade.
The writer is an assistant professor of economics and a research fellow at CBER, Institute of Business Administration, Karachi. He also chairs the Economic Advisory Group
