AFTER recording a surplus of $2.1bn in FY25 for the first time in 14 years, the nation’s current account has slipped back into a deficit of $624m during the first two months of the current fiscal year, underscoring renewed pressures on the external sector. Even though the gap narrowed to $245m in August — a 35pc improvement on July’s $379m on account of softer outflows and resilient remittances — the reprieve could prove to be short-lived amid the devastation caused by the floods across Punjab and beyond. A nearly 200pc increase in the month-over-month gap in August and an over 45pc increase in the year-over-year deficit in the July-August period are hardly reassuring, and underscore the external sector’s structural fragility. The reversal in the trajectory of the current account deficit highlights the vulnerability of our balance-of-payments at a time when flood-related crop and infrastructure losses and the potential increase in food imports threaten to expand the gap further. The State Bank notes in its latest monetary policy statement that the external sector outlook remains susceptible to evolving domestic and global conditions, and that flood-related crop damage could widen the trade deficit.

Some analysts have rightly stressed that continued IMF engagement, timely multilateral and bilateral inflows and resilient remittances can cushion the pressure going forward. The bank, too, hopes that the deficit will remain manageable in the range of 0-1pc of GDP this year, despite flood-related import pressures, with reserves expected to inch up from $14.5bn to $15.5bn by December. Besides, there is optimism that the defence pact with Saudi Arabia will go beyond security ties to create new avenues for bilateral trade and investment, injecting fresh liquidity into the economy. Yet such expectations must be tempered with practical thinking. The reality is that we are overly dependent on official foreign inflows and remittances to finance our essential imports, growth, debt payments and reserves build-up amid drying foreign private investment. Our industrial and agricultural output remains low and exports are stagnant, fuelling the trade deficit and enhancing external sector vulnerability to small shocks. Without credible and consistent governance and policy reforms to improve productivity and grow our exports, even a modest current account deficit could snowball into a bigger crisis. Betting on geopolitical advantages to take care of our structural problems has never paid off.

Published in Dawn, September 20th, 2025