The crackdown launched late last month against the smuggling of hard currencies out of Pakistan has checked speculative demand for dollars. However, the dollar shortage in the market appears to be driven primarily by imports and debt repayments, as evidenced by the decline in foreign exchange reserves and a significant rise in the merchandise import bill.

Pakistan’s total foreign exchange reserves fell to about $19.5 billion as of August 1 from $19.6bn a week earlier, according to the State Bank of Pakistan (SBP).

While the outflow of foreign exchange and the landing of goods do not happen simultaneously, it is worth noting that merchandise exports of the country consumed 29 per cent more foreign exchange in July this year than in the last year ($5.5bn vs $4.2bn), the latest update of the Pakistan Bureau of Statistics shows.

In a year marked by relentless global headwinds, Pakistan has achieved what few thought possible: a current account surplus. For a country long accustomed to haemorrhaging foreign exchange, the $2.1 billion surplus in FY25 feels almost surreal. Remittances have surged, IT exports held their ground, and imports were tightly leashed.

With annual debt repayments nearing $25bn and interest costs eating up a little less than half the total annual revenue, the fiscal space is suffocating

The current account surplus is not just a number — it’s a narrative shift. After 14 years in the red, Pakistan has, for once, brought in more (short-term) foreign exchange than it sent out. That’s a big deal.

Remittances, contributing $38bn, are the true engine behind this feat. Pakistani workers abroad, especially in the Gulf and the US and UK, continue to send money back home in record volumes.

Add to that a quietly thriving IT export sector and a freelance ecosystem, and you get a picture of resilience. In fiscal year 2024-25, Pakistan’s IT and IT-enabled services’ exports fetched $3.8bn, up 18pc from the previous year’s $3.2bn, latest SBP stats reveal.

Meanwhile, imports — often the villain of Pakistan’s external economy’s tale — remain suppressed despite the dismantling of most of the tariff and non-tariff barriers due to low economic growth and delayed industrial recovery. The rupee has started feeling the heat of growing external debt payments, but remained somewhat stable in the last fiscal year, helping in containing imports’ growth. It’s a delicate equilibrium, but for now, it’s working.

Beneath the surface, however, the fragilities are formidable. What makes this fact speak louder than anything else is that despite earning a $2.1bn current account surplus, Pakistan had to endure an overall balance of payment deficit of $3.74bn in the last fiscal year, the SBP balance of payment report reveals.

Pakistan’s external debt and liabilities exceeding $130bn (as of March 2025) cast a long shadow over any good news. With annual repayments nearing $25bn and interest costs eating up a little less than half the total annual revenue, the fiscal space is suffocating. This is not just a debt — it’s a chokehold.

And while remittances have saved the day, they are far from guaranteed. Economic slowdowns in host countries, coupled with the rising costs of formal transfers, could disrupt these flows. Much also depends on the accuracy of Pakistan’s positioning in the fast-unfolding geopolitics of the Middle East and on the continuation of the recent warmup in Islamabad-Washington ties.

Our dependence on a few sectors — textiles, food, leather — makes our export profile worryingly narrow. Imports may be under control now, but the structure of trade remains lopsided.

Then there’s foreign direct investment — or rather, the lack of it. At just $2.46bn, foreign investment remains tepid. The reasons? Legal ambiguities, erratic policymaking, and an atmosphere of political uncertainty. Global investors may be watching, but few are mobilising foreign investment towards Pakistan. Yet this moment presents a rare window for transformation — if the country dares to seize it.

Debt servicing cannot continue in its current form. Pakistan must pivot from endless rollovers of loans from friendly countries, including China, Saudi Arabia and UAE, to genuine restructuring — extending maturities, negotiating concessional terms, and exploring innovative tools like GDP-linked bonds.

There’s also room to diversify exports towards biotech, sustainable energy, and high-value services. The digital economy is ripe for support. Formalising freelance income through tax incentives, social security, and easier dollar retention could turn this sector into a real export engine.

Most of all, Pakistan must rebuild investor trust. Legal clarity, policy consistency, and guarantees that outlast governments — not just tax perks — are key to attracting long-term capital.

The biggest threat to this fragile stability? A premature import rebound.

As factories rev back into gear, demand for oil, machinery, and raw materials will rise — fast. Without a smart substitution strategy, the surplus could vanish in a fiscal blink. Blunt import restrictions won’t cut it. What’s needed is investment in domestic production, local value chains, and energy-efficient technologies.

Global commodity volatility remains a sword hanging over Pakistan’s reserves. SBP’s foreign exchange reserves of $14.2 billion (as of August 1) are still razor-thin when stacked against future obligations. Regional instability, oil price shocks or a spike in imports-led dollar demand could easily tip the scales.

Let’s be clear: Pakistan’s current account surplus is a triumph. But it is not a strategy. It’s a breather — an opportunity to regroup, reform, and reimagine the future. The current account surplus is real, but so is the fragility of our external economy. What Pakistan does next will determine whether this rare moment of stability becomes a platform for renewal — or just another pause before the next storm.

Published in Dawn, The Business and Finance Weekly, August 11th, 2025