Driven by a growing trade deficit, Pakistan’s current account has widened rapidly in recent months, which has raised concerns over the sustainability of the country’s external position going forward. As imports continue to fast outpace stagnant exports significantly, the pressure is mounting on the home currency.
The State Bank appears cognisant of the situation and has tightened restrictions on individual dollar purchases from the open market. Yet, the widening imbalance — in spite of robust remittances keeping the market liquid — has strengthened market expectations that the rupee would eventually have to adjust, the central bank’s efforts to maintain stability through administrative and monetary measures notwithstanding.
In this context, the sharp slide of the Indian rupee in recent months is proving to be an important external anchor, sharpening focus on regional competitiveness and heightening worries that Pakistan’s currency may be becoming overvalued.
India’s rupee has struggled for three months since high US tariffs — among the steepest on any Asian nation — on Indian exports took effect in late August. Even as the country’s economic fundamentals remain resilient and equity markets hover near record highs, the tariffs have pushed India’s merchandise trade deficit to a record level, with exports to the US down nine per cent year-on-year.
‘It took us 15–20 years to build a competitive interbank market, which we have destroyed by managing the exchange rate’
The Indian currency is down by 4.3pc versus the dollar this year, sliding by 0.9pc on Friday to a lifetime low of 89.48, surpassing the previous record low of 88.8 in September, as the Reserve Bank of India pulled back its support for the currency.
Pakistani exporters are now increasingly anxious about currency devaluation, arguing that it is necessary to maintain their competitiveness in international markets. To support their argument for currency devaluation, many insist that they risk losing market share unless the rupee also finds a lower equilibrium, with India allowing its currency to weaken.
Pakistan’s current account deficit has widened to $733 million in the first four months of the current financial year, nearly 3.5 times higher than the $206m deficit recorded in the same period last year, according to the latest balance of payments data from the SBP. The pressure on the current account is coming directly from rising imports as the central bank relaxed curbs under the International Monetary Fund directives and growth quickens. Exports continue to stagnate because of a variety of reasons, including but not limited to what exporters term a “managed exchange rate”.
The Indian currency is down by 4.3pc versus the dollar this year, sliding by 0.9pc on Friday to a lifetime low of 89.48
Imports have surged 10 per cent to $24.92 billion in 4MFY26 from $22.65bn in 4MFY25, while exports increased 4.8pc to $13.66bn compared to $13.04bn a year ago. Consequently, the trade deficit in goods and services has expanded to $11.26bn from $9.61bn a year ago.
That the current account gap continues to widen in spite of robust growth in workers’ remittances, which increased 9.3pc to $12.96bn in 4MFY26 from $11.85bn during the same period last year, underscores that this trend could intensify going forward unless imports are restricted and exports pushed. A further deterioration in the fragile external sector would bring more pressure on the rupee.
More curbs on imports are likely to fetch severe public criticism, as the government is already blamed for failing to boost economic growth over the last three years. Many argue that the government has deliberately cut GDP growth to keep the current account under control. The government achieved a surplus of $1.9bn last year, but growth stagnated at 3pc.
The recent trajectory of the current account underscores how vulnerable Pakistan’s external position remains to swings in global commodity prices, which inflate the import bill, and to the performance of workers’ remittances, the country’s most reliable source of foreign exchange. In FY22, a steep widening of the deficit depleted foreign exchange reserves, triggered a balance-of-payments crisis and forced renewed engagement with the International Monetary Fund.
The subsequent reduction of the deficit in FY23 and the modest gap in FY24 were largely the result of policy-driven measures, most notably stringent import controls that helped compress demand but also dampened economic growth and killed industrial activity. Last year’s surplus was primarily due to record-high remittance inflows, controlled imports and stronger information technology and telecom exports, which together offset the persistent deficit in goods trade.
Analysts argue that the core problem is structural: Pakistan consumes far more than it produces. “Pakistan’s structural weaknesses, primarily its heavy dependence on imports and a chronically weak export base, have historically kept the current account in deficit,” a banker noted. “The growing deficit mirrors a deeper vulnerability: we are a country trapped in a debt cycle, where we borrow to finance consumption and then borrow again to repay those loans.”
Textile exporters share this view. “The way forward requires a decisive shift toward a productivity-led, export-oriented growth model. That means redirecting incentives toward production and exports. Pakistan needs a productivity revolution to build a competitive, export-driven economy,” said an exporter from Faisalabad. But he added that such a transformation requires consistent policies sustained over several years. “While we move in this direction, we must align our exchange rate with our industrial competitiveness to protect our existing exports for now.”
Another major textile exporter was sharply critical of the government and the SBP for “artificially managing the exchange rate”. He lamented, “It took us 15–20 years to build a competitive interbank market, which we have destroyed by managing the exchange rate. How come all banks quote the same rate unless the exchange rate is being managed?”
He rejected the claim that the exchange rate has little bearing on export competitiveness. “Undoubtedly, a sudden major spurt of devaluation after a period of managed exchange rate does not help; rather, it hurts the economy, as we have seen since the early 2000s. Each period of managed exchange was followed by rounds of major devaluations, leading to hyperinflation and expensive raw material imports, and all this happened after our exporters had already lost market share internationally. Currency devaluation works only if it follows a gradual and natural course.”
According to him, the government has limited options if it intends to keep the rupee “stable” at its present level without eroding export competitiveness further: interest rates would need to be slashed to 5–6pc from the current 11pc, and energy prices for exporters would have to fall substantially.
“The government and the central bank can manage the current account and the exchange rate as long as remittances keep growing. But they cannot protect goods and services exports by maintaining a lid on the exchange rate. The sooner this lid is lifted, the better, because the exchange rate has to adjust sooner or later. The longer it takes, the more damaging it will be for the economy and exports both.”
Published in Dawn, The Business and Finance Weekly, November 24th, 2025
