Pakistan’s external economy is walking a tightrope. Despite temporary relief from a surge in remittances and renewed International Monetary Fund (IMF) support, the structural vulnerabilities of the country’s external sector have only deepened. Mounting debt, low reserves, record-high profit repatriation, and geopolitical aftershocks are coalescing into a volatile mix as fiscal year 2024-25 draws to a close.

In the first eleven months of FY25 (July 2024–May 2025), overseas Pakistanis sent home $34.9 billion, according to the State Bank of Pakistan (SBP) — a remarkable 28.8 per cent increase from the previous year. This remittance windfall has been pivotal in covering the growing trade deficit and defending the rupee.

However, the sustainability of this support remains uncertain. Shifting labour market dynamics and great uncertainty added to the economic prospects of the Gulf Cooperation Council nations affected by the Iran-Israel war, plus heightened concerns about the cyber security of financial transactions, pose risks to these inflows.

In parallel, the IMF has released $1bn under its Extended Fund Facility, following Pakistan’s compliance with key reform benchmarks. The country has also signed a new $1bn loan agreement with Middle Eastern financial institutions, offering short-term support but adding to its debt stock. This facility, secured at 6-7pc interest, reflects the cost of Pakistan’s continued reliance on external borrowing to bridge its financing gaps.

Experts agree that it is time for Pakistan to act decisively by expanding the tax base, eliminating exemptions, and restructuring bilateral and multilateral debt

These inflows, however, merely buy time. As FY26 begins on July 1, Pakistan faces $9.2bn in external debt repayments, following nearly $18.8bn repaid in FY25. Total external financing needs are projected at $20.1bn, as per IMF estimates. The country’s external debt has surpassed $130bn, with public sector obligations standing at $87.4bn.

Foreign exchange reserves remain thin despite recent build-ups. As of June 13, SBP reserves were reported at $11.722bn, and total reserves — including those held by commercial banks — at $17bn. The SBP reserves are barely enough to cover a little more than two months of imports. Any delay in substantial inflows, further oil price spikes amidst the Iran-Israel conflict, or capital outflows could start eroding this cushion within weeks.

The pressure on forex reserves has intensified due to a sharp rise in profit and dividend repatriation, which surged to $2.1bn in 11MFY25 — the highest in six years. Multinational companies appear more confident in transferring profits abroad after the removal of all formal and informal restrictions by the SBP under the IMF’s insistence. While this may signal improved business sentiment, it also puts additional strain on the balance of payments.

During the past month has the rupee lost 0.66pc of its value to the greenback, coming down to 283.64 to a dollar on June 19 from 281.77 on May 19

Imports in FY24 totalled $63.3bn, while exports hovered around $38.9bn, yielding a $24bn-plus trade deficit. The import bill remains inflated by $15bn in annual energy imports — an area particularly sensitive to global oil shocks.

This vulnerability was laid bare following the Iran-Israel clash in early June, which triggered an 11pc spike in international oil prices. With Brent crude crossing $75 per barrel, Pakistan’s energy import bill is likely to rise significantly, worsening inflation and draining reserves. A potential escalation in the region could push oil toward $100–$120, with devastating consequences for oil-importing economies like Pakistan.

Amid this tense backdrop, a significant diplomatic event unfolded. On June 18, US President Donald Trump met Pakistan’s Army Chief General Asim Munir in Washington. The meeting signals a possible warming of relations with the US administration with possible trade tariff concessions for Pakistan and fresh pledges of US and US-backed foreign investment into Pakistan.

Yet, in terms of balance, the international financial community remains cautious. Fitch Ratings recently flagged Pakistan’s “elevated external liquidity risks”, warning of potential credit downgrades if structural reforms falter. The country continues to offer over Rs6tr (about $21bn) in annual tax exemptions — nearly equivalent to its yearly debt repayment obligations — highlighting the need for urgent fiscal realignment. But fiscal realignment alone is not enough.

In 11 months of this fiscal year, total foreign direct investment stood around $2bn, according to SBP data. Compare this with profit and dividend repatriation abroad of $2.1bn and you see a dangerous trend in the making.

Policymakers and experts generally agree that it is time for Pakistan to act decisively. This means expanding the tax base and eliminating blanket exemptions, reforming the energy sector and reducing circular debt, diversifying exports beyond textiles and foods, and reprofiling and restructuring bilateral and multilateral debt — particularly with China and the Gulf lenders. But is doing all that so simple, particularly in a fractured local political system and amidst growing geopolitical changes? Your guess is as good as mine.

With the new fiscal year commencing July 1, even a modest oil shock or delay in projected fund disbursements by international financial institutions and friendly countries could trigger a forex crisis. Only during the past month has the rupee lost 0.66pc of its value to the greenback, coming down to 283.64 to a dollar on June 19 from 281.77 on May 19.

Published in Dawn, The Business and Finance Weekly, June 23rd, 2025