Pakistan’s Economy Under Pressure as Trade Gap Grows and Prices Rise

Pakistan’s economic outlook has entered a critical phase as widening trade deficits and persistent inflation threaten to slow down the momentum of recovery.

While the PML-N government maintains confidence in macroeconomic stability, recent data highlights challenges that demand careful policy navigation.

Trade Deficit Widens Sharply

Recent figures from the Pakistan Bureau of Statistics paint a concerning picture of the country’s external sector performance.

Key Highlights (July–October FY26)

Exports fell by 4% YoY to $10.448 billion
Imports surged by 15% YoY to $23.03 billion
Trade deficit widened by 38% YoY, reaching $12.582 billion

In October 2025 alone, the trade deficit grew 56% YoY to $3.2 billion, despite registering a slight decline compared to September.

Imports crossed the $6 billion mark for the first time in almost three years, signaling heightened import demand.

Why the Trade Gap Matters

Rising imports and weakening exports have created a difficult policy dilemma.

Risks

Growing trade deficit may pressure foreign exchange reserves
Potential instability in the exchange rate
Current account surplus target may slip out of reach

However, restricting imports to protect the external account carries its own risks:

Slower industrial production
Job losses
Higher poverty rates

Pakistan’s policymakers now face the challenge of supporting economic activity without allowing the external deficit to spiral out of control.

Inflation Continues to Rise

Inflation rose to 6.2% in October, the highest rate so far this year, although it remains within the government’s annual forecast range.

More concerning for economists is core inflation, which continues to hover above 7.5%.

Implications of Elevated Inflation

Limited room for broad economic stimulus
A tighter monetary environment may persist
Delayed reforms due to concerns over cost-of-living pressures

Persistent inflation makes it harder to introduce structural changes, particularly in public sector reforms, taxation, and energy pricing.

Government’s Position and Path Ahead

Finance Minister Muhammad Aurangzeb has reiterated confidence in ongoing reforms and the strengthening macroeconomic environment, focusing on:

Attracting foreign investment
Enhancing GDP growth
Implementing long-term structural reforms

However, analysts warn that without concrete improvement in export competitiveness and industrial capacity, growth may remain fragile.

Reliance on foreign inflows offers short-term relief, yet sustainable growth hinges on productivity and trade improvements.

The Economic Crossroad

Pakistan’s economy stands at a pivotal point, shaped by two competing priorities:

Allowing Imports to Rise

Pros

Supports industrial activity
Helps maintain supply chains
Encourages private-sector expansion

Cons

Weakens the external account
Risks exchange-rate volatility
Could drain foreign reserves

Restricting Imports Aggressively

Pros

Protects the current account balance
Supports rupee stability
Helps accumulate reserves

Cons

Reduces economic output
Raises unemployment
Increases poverty pressure

What Needs to Happen

For a balanced recovery, experts emphasize:

Boosting export capacity and diversification
Supporting domestic industries through reforms, not protectionism
Improving energy competitiveness and business climate
Enhancing productivity instead of relying solely on import controls
Strengthening inflation-management policies

Conclusion

Pakistan’s economic recovery remains possible, yet delicate. The trade deficit and inflation trends signal that policymakers must strike a careful balance between growth and stability. Sustained improvements require decisive reforms focusing on exports, industry competitiveness, and investment climate enhancement.

The coming months will be crucial. Policymakers must manage import pressures, support domestic production, and address inflationary concerns to ensure that the recent progress evolves into a durable recovery rather than a temporary rebound.