Pakistan's record USD41.6 billion in workers' remittances almost single-handedly prevented a much larger external deficit in FY26, masking a widening trade gap that reached USD35.51 billion and leaving the country's apparently stable external position heavily dependent on money sent home by overseas workers. The current account ended fiscal year 2025-26 with a deficit of just USD139 million, according to the State Bank of Pakistan. That was nevertheless a marked reversal from the USD1.84 billion surplus recorded in FY25.
June provided a sharper warning. The current account swung to a USD649 million deficit from a USD500 million surplus in May and a USD220 million surplus in June 2025. The deterioration came as the monthly goods trade deficit widened to USD3.55 billion, from USD3.28 billion in May and USD2.43 billion a year earlier. Over the full fiscal year, the imbalance in merchandise trade expanded substantially. The goods deficit reached USD33.62 billion, compared with USD26.80 billion in FY25. Services provided some relief, with their deficit narrowing to USD1.89 billion from USD2.84 billion. In June alone, services recorded a USD25 million surplus. Combining goods and services, Pakistan ran a USD35.51 billion trade deficit in FY26, up from USD29.64 billion the previous year. The primary-income account, which includes interest and profit payments, added another USD8.44 billion deficit.
The counterweight was money arriving from abroad. Secondary income produced a USD43.81 billion surplus during FY26, while workers' remittances alone amounted to USD41.59 billion, compared with USD38.30 billion in the previous year. Separate SBP figures put the annual increase in workers' remittances at 8.6%, taking inflows to a record USD41.6 billion. The surge provided crucial support to the external account while Pakistan continued to meet import payments, debt obligations and foreign-exchange reserve targets.
Yet the strength of remittances also exposes a structural weakness. Pakistan's trade deficit in goods and services was approximately USD35.5 billion, and after the primary-income shortfall was included, the gap approached USD44 billion. Secondary-income receipts of USD43.8 billion almost completely offset it. Goods exports declined during the year while goods imports increased.
That makes the near-balanced current account less an export-driven improvement than one sustained by income earned abroad. The dependence has grown quickly. Remittances have risen from about USD27 billion three years ago to USD41.6 billion in FY26, an increase exceeding USD14 billion. Over the same period, merchandise exports have stagnated in dollar terms and declined relative to the size of the economy.
Much of the money comes from a relatively concentrated group of economies. Around 54% of Pakistan's remittances originate in Gulf Cooperation Council countries. Saudi Arabia contributed approximately USD9.8 billion during FY26, the United Arab Emirates USD8.8 billion and the other GCC economies another USD3.9 billion. The concentration creates exposure to regional disruption. Excluding Saudi Arabia, about USD12.7 billion in annual remittances come from Gulf economies exposed to changes in trade, aviation, tourism, construction and expatriate employment. A 10% fall in those non-Saudi GCC flows would remove roughly USD1.3 billion from Pakistan's external account.
The Middle East therefore presents risks on both sides of Pakistan's external ledger. A prolonged confrontation involving Iran and the United States could raise energy costs while disrupting the economies and labour markets that generate a large share of Pakistan's remittance income. Pakistan remains heavily reliant on imported petroleum, and much of its oil and liquefied natural gas supply moves through or close to the Strait of Hormuz. A sustained rise in crude prices, freight charges or insurance costs would increase the import bill while feeding domestic inflation and the fiscal cost of energy. Higher oil prices do not necessarily mean weaker remittances. Greater hydrocarbon revenues have historically supported employment and government spending in Gulf economies. The more serious danger would be a conflict that disrupted commercial activity, transportation, financial channels or expatriate labour markets sufficiently to overwhelm that benefit.
Pakistan could also suffer indirectly through weaker demand for its exports. A prolonged energy shock could complicate monetary easing in Europe and the United States, constrain household spending and reduce demand for imported textiles, clothing and manufactured goods. The resulting combination of a larger import bill, weaker remittances and softer exports would put several sources of foreign exchange under pressure simultaneously. The export side already presents problems. Merchandise exports have declined from about 8.5% of GDP in FY22 to around 6.8% in FY26. Exporters face corporate taxation, super tax, the withdrawal of previous concessions, high energy costs, expensive financing, regulatory uncertainty and unreliable infrastructure.
Currency movements add another complication. The SBP's published Real Effective Exchange Rate reached approximately 106.4 in June, its highest level in several years. Although a reading above 100 does not by itself establish that the rupee is fundamentally overvalued, it indicates that the currency has appreciated considerably in inflation-adjusted terms relative to Pakistan's trading partners.
Services offer a brighter spot. Information technology and business-services exports have risen substantially, supported by preferential taxation, easier payment arrangements and a lighter regulatory regime. Total services exports increased to around USD10 billion in FY26. Their scale, however, remains insufficient to compensate for the merchandise imbalance. A goods trade deficit exceeding USD33 billion cannot be offset by software exports alone while agriculture, textiles and manufacturing struggle with competitiveness. Imports are recovering, too, and not necessarily because productive investment is booming. Non-oil purchases from abroad have rebounded sharply from their post-crisis lows and are approaching their previous peak even though economic growth remains below 4%. Completely knocked-down automobile-kit imports have reached record levels while local vehicle assembly remains below its earlier peak, suggesting greater spending on more expensive vehicles and higher imported content. Similar patterns ha ve appeared in smartphones and other consumer goods. Consumption, according to the material, is recovering faster than productive capacity.
Investment provides little offsetting reassurance. Foreign direct investment fell to approximately USD1.6 billion in FY26, while domestic savings remain inadequate to finance development needs. Large-scale investment expected from mining has yet to materialise, with deteriorating security in Balochistan cited as one factor increasing project costs and discouraging investors.
Pakistan has at least rebuilt part of its financial buffer. SBP reserves ended June at roughly USD18.4 billion, almost USD4 billion higher than a year earlier, before declining following external payments after the fiscal year ended. The central bank has also been buying dollars from the interbank market to replenish reserves. But reserve accumulation is not the same as a durable increase in the economy's capacity to earn foreign currency. The central bank has been absorbing liquidity generated by exceptional remittance inflows and turning part of it into official reserves.
There is also a change under way in the mechanisms designed to encourage formal remittances. The SBP has begun winding down the Sohni Dharti Remittance Programme, with new reward points ending from July 1, 2026. Existing points accumulated on eligible transactions up to June 30 can be redeemed until June 30, 2027. Separately, the central bank discontinued the Telegraphic Transfer Charges Incentive Scheme from July 1, ending reimbursement to banks and other authorised institutions for processing eligible workers' remittances. Pakistan thus enters FY27 with a paradox. Its current account is close to balance and its remittance receipts have never been higher, yet the underlying trade deficit has widened considerably and foreign investment remains weak.
The USD139 million current-account deficit therefore tells only part of the story. Pakistan has accumulated remittances and reserves while running a substantially larger trade imbalance. Without stronger merchandise exports, greater investment and improved competitiveness, the stability remains dependent on overseas workers and favourable external conditions. The more difficult test in FY27 will consequently be not merely whether economic growth exceeds 4%, but whether Pakistan can sustain expansion without again exhausting the foreign exchange needed to finance it.