By Hasan Salahuddin

Pakistan’s trade deficit widened by nearly 36 percent during the first half of FY26 as rising imports outpaced declining exports despite improvements in global trade activity, according to the State Bank of Pakistan’s Half Year Report 2025-26.

The report said imports increased 12.4 percent during H1-FY26 while exports declined 5 percent, reflecting stronger domestic demand, increased industrial imports and weakness in key export sectors such as rice.

According to the SBP, the widening trade imbalance partly reflected the recovery in economic activity as industrial production and domestic consumption gained momentum during the review period.

The report said lower energy and raw cotton prices helped contain the import bill to some extent, but import volumes increased across most major categories.

The composition of imports also began shifting after tariff rationalisation measures were introduced under the National Tariff Policy 2025-30.

Imports of machinery, metals and transport-related products increased more strongly in sectors where tariff reductions were implemented across a larger number of tariff lines.

The SBP said the increase in industrial and machinery imports reflected a recovery in manufacturing activity and stronger domestic demand.

At the same time, export performance remained weak despite growth in global trade.

The decline was led primarily by lower rice exports, which were affected by falling global commodity prices, increased international competition and disruptions linked to closure of Pakistan’s western border.

Although value-added textile exports remained relatively resilient, the improvement was insufficient to offset broader export weakness.

The report said Pakistan’s export sector continues to face structural problems that limit long-term competitiveness.

The SBP identified low productivity, policy inconsistency, weak integration into global value chains and lack of market diversification as major factors behind the country’s declining export-to-GDP ratio over the past two decades.

These weaknesses have left Pakistan highly vulnerable to global price fluctuations and external demand shocks.

Despite the deterioration in trade performance, Pakistan managed to contain the current account deficit at moderate levels because of strong remittance inflows.

Workers’ remittances increased to $19.7 billion during H1-FY26 compared with $17.8 billion a year earlier, helping finance the trade gap and support foreign exchange reserves.

The SBP’s liquid foreign exchange reserves rose to $16.1 billion by December 2025 from $14.5 billion at the end of FY25.

The report said exchange-rate stability and reserve accumulation improved confidence in the external account during the review period.

However, the central bank warned that geopolitical tensions and changing global trade patterns could create additional challenges for Pakistan’s trade outlook.

The ongoing war in the Middle East has increased freight charges, insurance costs and supply-chain uncertainty, potentially raising import costs further in the coming months.

The report also warned that slower global economic growth and shifting tariff policies could weaken external demand for Pakistan’s exports.

For FY26, the SBP projected exports in the range of $29.5 billion to $30.5 billion, significantly below the official target of $35.3 billion. Imports are projected between $63.5 billion and $64.5 billion.

The SBP stressed that sustainable improvement in trade performance would require deeper reforms aimed at boosting productivity, diversifying exports, improving technology adoption and strengthening integration with international supply chains.

The report added that transitioning toward an export-oriented growth model remains essential for reducing Pakistan’s vulnerability to recurring balance-of-payments pressures.

Credit: INP-WealthPk