By Qudsia Bano

Pakistan's merchandise trade deficit widened to $27.9 billion during July-March FY2025-26 from $22.7 billion in the corresponding period of the previous fiscal year, reflecting stronger import demand amid economic recovery and rising domestic activity, according to the Pakistan Economic Survey 2025-26 released by the Ministry of Finance.

The increase in the trade gap came despite resilience in the external sector and highlights the growing demand for imported energy products, machinery, industrial inputs and other essential commodities as economic activity gained momentum.

According to the survey, imports increased by 6.9% during July-March FY2025-26, driven primarily by higher domestic demand associated with the recovery in agriculture, manufacturing, construction and services sectors.

The Ministry of Finance notes that Pakistan's economy expanded by 3.7% during FY2025-26, supported by growth across all major sectors. Increased economic activity typically raises demand for imported raw materials, machinery, petroleum products and intermediate goods needed for production and investment.

The survey highlights that import growth was concentrated in essential sectors of the economy. Higher imports of petroleum products, agricultural inputs, chemicals and electrical machinery contributed significantly to the increase in the import bill.

Petroleum imports remained a major component of the country's external trade. During July-March FY2025-26, Pakistan imported 13.8 million metric tonnes of petroleum products, up from 12.5 million tonnes during the same period last year. The petroleum import bill increased to $8.9 billion, reflecting both higher import volumes and volatility in international oil prices.

According to the survey, export performance remained under pressure during the fiscal year. Merchandise exports declined by 8% amid subdued global demand and geopolitical tensions that affected international trade and shipping routes.

The report notes that escalating tensions in the Middle East and disruptions in global trade routes created additional challenges for exporters by increasing shipping costs, insurance premiums and logistical uncertainties.

Despite pressures on merchandise exports, several export-oriented sectors continued to perform relatively well. The survey highlights positive contributions from value-added textile categories, including knitwear, readymade garments and bedwear.

The services sector provided important support to the external account during FY2025-26. According to the survey, the services deficit narrowed to $2.1 billion from $2.3 billion in the previous year, largely due to strong growth in information technology exports.

ICT export remittances increased by 19.7% to $3.38 billion during July-March FY2025-26, helping offset part of the pressure arising from merchandise trade. The growing contribution of the IT sector continues to support export diversification and foreign exchange earnings.

The survey notes that strong workers' remittances also played a crucial role in maintaining external sector stability despite the widening trade deficit. Remittance inflows increased by 8.2% to $30.3 billion during July-March FY2025-26, supported by robust inflows from Gulf countries, particularly Saudi Arabia and the United Arab Emirates.

According to the Ministry of Finance, these remittance inflows helped cushion the impact of the higher trade deficit and contributed to maintaining a broadly balanced external position.

As a result, Pakistan recorded a current account surplus of $72 million during July-March FY2025-26 despite the larger merchandise trade gap.

The survey further highlights that foreign exchange reserves strengthened during the fiscal year, reaching $21.8 billion by the end of March 2026. Improved reserve levels helped support exchange rate stability and strengthened external sector resilience.

According to the Ministry of Finance, sustaining export growth, expanding value-added production and diversifying export markets remain important priorities for reducing external vulnerabilities and narrowing the trade gap over the long term.

While the widening trade deficit reflects increasing import demand associated with economic recovery, the survey notes that continued growth in remittances, services exports and foreign exchange reserves helped maintain overall external sector stability during FY2025-26.

Credit: INP-WealthPk