ISLAMABAD: The Federal Government has consistently portrayed Pakistan’seconomy as on a path of stabilization and growth, citing moderatedinflation, improved fiscal measures, and projected GDP expansion above 4percent for fiscal year 2025-26. However, recent statistics from the StateBank of Pakistan and trade authorities reveal a contrasting reality,characterized by a widening trade deficit, a shift to current accountshortfalls, and deepening industrial distress including widespread factoryclosures and job losses. These indicators highlight ongoing external sectorfragility and the adverse consequences of high interest rates and energycosts on domestic production and employment.
In the first half of fiscal year 2025-26 (July to December 2025),Pakistan’s merchandise trade deficit expanded significantly to $19.20billion, marking a 35 percent increase from the corresponding period in theprevious fiscal year. Exports declined by 7.78 percent to approximately Rs4.27 trillion, with a sharp 21.44 percent drop recorded in December alone.Imports rose by 13.12 percent to Rs 9.72 trillion, driven by higher energyand raw material requirements amid partial economic recovery efforts. Thisimbalance underscores structural challenges in export competitiveness andreliance on imported inputs.
The current account balance further deteriorated during the same period,posting a cumulative deficit of $1.174 billion, a reversal from a $957million surplus in the prior year’s first half. December 2025 alone saw a$244 million deficit, compared to a modest surplus in November. Whileremittances and services inflows provided partial support earlier, risingimport bills and stagnant export performance have eroded these buffers,increasing dependence on external financing and heightening vulnerabilityto global commodity price fluctuations.
Trade deficits with neighboring countries widened dramatically by 44.42percent to $7.683 billion in the first half of FY26, reflecting reducedregional export opportunities and intensified import pressures. Officialprojections for full-year improvement remain unconvincing given monthlytrends, where exports have contracted for several consecutive periods dueto subdued global demand, domestic cost pressures, and limiteddiversification beyond traditional commodities.
Beyond external accounts, domestic economic measures have exacerbatedvulnerabilities in the industrial sector. High policy interest rates,maintained at 10.5 percent by the State Bank of Pakistan as of January2026, have imposed severe liquidity constraints on businesses, particularlysmall and medium enterprises. Combined with elevated energy tariffs andtaxation burdens, these factors have triggered widespread factory closures,notably in the textile industry, a key export driver. Industry reportsindicate that around 150 large textile units shut down over recent years,with additional non-operational facilities including over 100 spinningmills and more than 400 ginning factories in late 2025.
The closures have led to substantial job losses and contributed to elevatedunemployment levels. Estimates suggest significant reductions inmanufacturing employment, with private investment in the sector decliningmarkedly and capacity utilization falling. Broader unemployment figuresshow persistent challenges, with rates remaining high and youth joblessnessparticularly acute, as industrial slowdowns limit opportunities inlabor-intensive sectors. These developments contradict government claims ofmanufacturing recovery and highlight the negative impacts of contractionarypolicies intended to curb inflation but stifling growth in productiveactivities.
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Structural weaknesses persist, including low export diversification, highimport dependency for energy and intermediates, and insufficient reforms toenhance productivity. Government incentives for exports and trade pactshave not yet translated into sustained gains, as evidenced by ongoingcontractions. The combination of external imbalances and domesticindustrial distress raises concerns over debt sustainability, reserveadequacy, and the broader economic outlook for the remainder of FY26.
Analysts emphasize that without targeted interventions—such as loweringproduction costs, improving trade logistics, and addressing energyaffordability—these vulnerabilities could undermine projected growth andinvestor confidence. The divergence between official narratives of economicstrengthening and empirical data on deficits, closures, and employmentlosses underscores the need for policy alignment with ground realities toachieve genuine and inclusive recovery.
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