Pakistan entered FY2027 with stronger fiscal and external buffers. According to the Finance Division’s monthly Economic Update and Outlook for August 2026, the fiscal deficit narrowed to 2.6 per cent of GDP in FY26, the primary surplus reached 2.9pc, large-scale manufacturing expanded by 4.98pc, and foreign-exchange reserves improved.

These are important achievements. However, the composition of foreign-exchange support presents a more revealing and less comforting picture.

During FY26, workers’ remittances reached $41.6 billion. Merchandise exports were $30.8bn, net foreign direct investment (FDI) was only $1.67bn, and portfolio investment recorded a net outflow of $1.19bn.

In other words, overseas Pakistanis sent home almost $11bn more than the country earned from merchandise exports. Remittances were nearly 25 times the amount of net FDI received during the year.

Country needs investors, not just inflows

This comparison reveals a foreign-exchange hierarchy that deserves greater policy attention. The most dependable external support is being provided neither by foreign investors nor by a transformed export sector, but by its workers abroad.

Remittances are indispensable for any economy and a lifeline for an economy like Pakistan. They support household consumption, education, healthcare and housing; reduce poverty; provide foreign exchange; and help finance the trade deficit. Their rise to $41.6bn significantly strengthened Pakistan’s external position in FY2026.

However, remittances should not be confused with investment or export-led transformation. They are recorded as secondary income in the balance of payments—not as exports or capital inflows.

Remittances improve the availability of foreign exchange, but they do not automatically create new factories, transfer technology, increase productivity or diversify exports. Their contribution to productive capacity depends on how recipient households use them and whether the domestic financial system can channel part of these flows into investment.

This distinction matters. An economy can report higher reserves and a manageable current-account balance while remaining structurally dependent on imported energy, machinery and industrial inputs.

The reported $30.8bn exports represent merchandise exports on a free-on-board basis. It does not include approximately $4.6bn earned from information technology and IT-enabled services during FY26.

IT exports form part of services exports in the balance of payments. They should, therefore, be analysed separately from textiles, rice, surgical instruments, sports goods and other merchandise.

This classification is more than a statistical detail. It highlights one of the most promising changes in Pakistan’s external economy.

IT exports reached $417m in July 2026 alone, an increase of 17.8pc over the corresponding month. Unlike several traditional exports, digitally delivered services require relatively limited imported raw materials and logistics expenditure. Their net foreign-exchange contribution may consequently be stronger than their gross value suggests.

The policy objective should not be to present IT exports as an addition to the merchandise figure without explaining the distinction. It should be to recognise digitally delivered services as a separate pillar of export competitiveness.

The weakest component of Pakistan’s foreign-exchange structure is private foreign investment.

Net FDI of $1.67bn is modest for an economy of Pakistan’s scale and development requirements. More importantly, the headline amount says little about the quality of investment. FDI directed towards export-oriented manufacturing, technology, logistics and renewable energy can increase productive capacity and generate future foreign-exchange earnings. Investment in protected domestic markets or non-tradable activities may generate future profit repatriation without producing equivalent export receipts.

Portfolio investment is even less dependable. The net portfolio outflow of $1.19bn during FY2026 demonstrates its sensitivity to risk perceptions, interest-rate expectations and global financial conditions.

FDI and portfolio investment should, therefore, not be grouped together under a single favourable label of “foreign investment”. One is generally associated with longer-term ownership and productive assets; the other can reverse quickly.

Pakistan needs to monitor not only how much foreign capital enters, but also its maturity, volatility, sectoral destination, import content and capacity to generate exports.

Pakistan recorded a relatively small current-account deficit of $304m in FY26. This is encouraging, but the headline balance should not be interpreted in isolation.

A current-account improvement can arise from stronger exports and productivity. It can also result from subdued imports, slower domestic demand, exceptional remittance growth or temporary movements in income payments. These alternatives have very different implications for economic welfare and future growth.

The opening month of FY27 illustrates the point. Goods exports increased by 9.4pc to $3.01bn, but goods imports rose faster—by 13.4pc to $6.15bn. The current-account deficit nevertheless narrowed to $328m from $529m a year earlier because remittances increased and the services and primary-income balances improved.

This was a favourable outcome, but it also demonstrates how strongly the external account continues to depend on remittances and other offsets to the merchandise deficit.

Foreign-exchange reserves are normally assessed by their size and import coverage. Pakistan should add another question: what is the quality of the flows supporting those reserves?

A dollar earned repeatedly through competitive exports is different from a dollar borrowed and repayable with interest. FDI that builds export capacity differs from short-term portfolio investment. A remittance provides non-debt foreign exchange but does not necessarily increase national productive capacity.

The composition of reserve accumulation, therefore, matters as much as its level.

Pakistan could introduce an annual foreign-exchange quality statement alongside conventional external-sector indicators. It should disclose the contribution of merchandise exports, services exports, remittances, FDI, portfolio flows, external borrowing and official programme financing to the change in reserves.

Such a statement would help distinguish structural improvement from temporary liquidity relief. Pakistan’s objective should not be to replace remittances. It should be to complement their stability with stronger productive inflows and more competitive exports.

First, investment policy should prioritise efficiency-seeking FDI that uses Pakistan as a production and export base. Investment incentives should be linked to measurable outcomes such as exports, technology transfer, domestic supplier development and skilled employment.

Second, IT and other digitally delivered services should be treated as a core external-sector industry. Stable taxation, reliable internet connectivity, predictable foreign-currency arrangements and investment in advanced skills would help convert recent growth into sustained export capacity.

Third, a portion of remittances could be channelled voluntarily towards productive investment through credible diaspora instruments, professionally managed funds and transparent project structures. These products must offer commercial returns and strong governance rather than relying only on patriotic appeal.

Fourth, export competitiveness should be assessed beyond the exchange rate. Energy reliability, logistics, customs efficiency, product quality, financing costs and technological capability ultimately determine whether firms can maintain global market share.

Pakistan’s recent stabilisation should be recognised, but its underlying composition should also be examined honestly. A country cannot base long-term external sustainability on the extraordinary contribution of its overseas workers while productive foreign investment remains modest and merchandise exports remain concentrated.

The next stage of economic reform must, therefore, move beyond accumulating foreign exchange to improving how that foreign exchange is earned.

Pakistan’s external account will become genuinely sustainable when its workers abroad are no longer carrying a burden that should increasingly be shared by competitive exporters, technology firms and long-term investors.

The writer is the chief financial officer at GCD Pakistan.

Published in Dawn, The Business and Finance Weekly, October 26th, 2026