Pakistan’s external sector recorded a significant improvement during the first quarter of fiscal year 2027, supported by stronger workers’ remittances, foreign investment and access to international capital markets. The country posted an overall balance of payments surplus of $3.1 billion during July-September FY2027, compared with a deficit of $274 million in the corresponding period last year. The improvement came despite a current account deficit of $874 million, driven primarily by higher import payments. Growth in goods exports and services exports helped cushion the pressure, while the services trade deficit narrowed slightly. Workers’ remittances increased by 14.0% to $10.9 billion, more than covering the combined goods and services trade deficit. These inflows strengthened foreign exchange availability, supported import financing and helped Pakistan meet its external payment requirements as domestic economic activity continued to recover.
Goods exports rose by 7.7% to $8.5 billion during the quarter, with food and textile shipments contributing to the increase. Food exports expanded by 25.3%, led by rice, while textile exports increased by 5.3%, supported by gains in cotton yarn, knitwear, towels and readymade garments. Export performance remains important for Pakistan because stronger foreign sales can generate additional foreign exchange and help offset the cost of imported goods and energy. However, goods imports increased more rapidly, rising 14.3% to $17.8 billion. The increase reflected higher purchases of machinery, metals and transport equipment, alongside rising energy costs. Machinery imports grew by 19.3%, metals by 24.0% and transport equipment by 19.2%. Petroleum imports also increased by 6.5%, as higher crude oil and petroleum product imports were partly offset by lower liquefied natural gas imports. The faster growth in imports contributed to the current account deficit, demonstrating the continuing challenge of balancing domestic demand and industrial requirements with foreign exchange availability.
A major development during the quarter was Pakistan’s successful issuance of $3.0 billion in sovereign Eurobonds in September, which broadened the country’s financing sources and demonstrated international investor participation in its financing programme. Portfolio investment recorded net inflows of $2.9 billion, compared with net outflows of $633.3 million in the same period last year. Foreign direct investment also increased by approximately 20% to $720 million, providing additional support to the financial account. Together, these inflows helped offset the pressure created by the current account deficit and contributed to the overall balance of payments surplus. By October 16, the State Bank of Pakistan’s liquid foreign exchange reserves stood at $21.5 billion, while total liquid reserves reached $26.8 billion. The stronger reserve position provides a larger buffer for meeting external obligations and financing imports, although the sustainability of these gains will depend on continued foreign inflows, export performance and the management of external financing requirements.
Monetary indicators also reflected changes in the government’s financing position during the opening months of FY2027. Broad money, measured by M2, contracted by 3.9% between July 1 and October 16, 2026, compared with a 2.5% contraction during the corresponding period last year. Net domestic assets declined by Rs2,360.3 billion, more than offsetting a Rs537.5 billion increase in net foreign assets. The main factor behind the decline in domestic assets was the net retirement of government borrowing for budgetary support, which reached Rs2,571.8 billion, compared with Rs1,822.9 billion a year earlier. Of this amount, Rs1,873.9 billion was retired from scheduled banks and Rs697.9 billion from the State Bank. Lower government borrowing from the banking system is consistent with the fiscal surpluses and availability of external financing reported during the period. This shift can reduce the government’s immediate reliance on domestic bank funding, although its wider effects on liquidity and credit availability depend on how financial conditions evolve.
Private sector credit demand remained relatively subdued, but the latest figures showed an improvement compared with the previous year. Businesses recorded net borrowing of Rs5.7 billion through October 16, compared with net retirement of Rs21.1 billion during the corresponding period last year. Despite the limited net borrowing during the current period, the outstanding stock of private sector credit remained approximately 15.0% above its level a year earlier. This suggests that the overall stock of financing has continued to expand annually even though fresh borrowing during the opening months of FY2027 remained modest. Private sector credit demand is expected to strengthen as cash crops arrive in the market, potentially increasing seasonal financing needs for agriculture, trading and related businesses. The extent of any recovery will also depend on borrowing costs, business confidence and expectations regarding domestic demand.
Monetary policy tightened further as the State Bank of Pakistan’s Monetary Policy Committee increased the policy rate by 50 basis points to 12.0%, effective October 27, 2026. The decision was aimed at addressing rising inflationary risks associated with the intensifying Middle East conflict and persistently high global energy prices. Higher energy costs can increase domestic inflation directly through fuel and utility expenses and indirectly through transportation, manufacturing and distribution costs. Raising the policy rate is intended to help contain inflationary pressures and keep expectations anchored, although tighter monetary conditions can also influence borrowing costs and private investment decisions. Pakistan’s economic outlook will therefore depend on how external financing, remittance inflows, exports and domestic credit demand develop alongside inflation and energy prices. The stronger balance of payments position provides important support, but sustaining it will require continued foreign exchange inflows, careful management of import growth and a stable macroeconomic environment.
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