External woes

PAKISTAN’S external sector has once again exposed the economy’s structural weaknesses that bilateral debt rollovers and short-term stabilisation measures had helped conceal.

The sharp 31pc decline in FDI in the first 10 months of FY26, coupled with the return of the current account deficit in April, underscores how the balance-of-payments position remains fragile despite stabilisation claims. It is not merely the fall in foreign investment volumes that is troubling but also the stubbornly meagre levels of FDI inflows for the past several years, which have fluctuated only marginally.

More than half the FDI came from China, reflecting our inability to boost foreign private inflows or diversify the foreign investment base. While Chinese investment is critical, it highlights the absence of broader investor confidence in Pakistan’s economic clime. Even Chinese inflows have declined from over $1bn last year to $740m this year, suggesting that a partner of long standing is becoming more cautious.

Also alarming is the scale of disinvestment. The withdrawal of capital from the telecom sector, including the likely impact of Telenor’s exit, sends a negative signal to foreign investors. Persistent policy uncertainty, taxation issues, currency instability and difficulties in profit repatriation have made MNCs wary of the local market, with various firms exiting Pakistan altogether in recent years.

That foreign capital still continues to flow — mainly into sectors offering guaranteed or protected returns rather than export-oriented manufacturing or technology-driven industries which could have ensured both growth and foreign exchange earnings — is another problem. Along with low private capital inflows, this situation limits FDI’s long-term developmental impact and perpetuates our reliance on debt and remittances.

The return of the current account deficit, therefore, reinforces wider concerns about the external sector. It reveals the vulnerability of the balance-of-payments to import pressures. The widening trade gap, particularly driven by food and other imports for consumption, points to the failure of our agricultural and industrial policies. It is a matter of concern that such deterioration has occurred despite a relatively contained oil bill, even though global energy prices have risen amid Middle East tensions.

Resilient remittances have so far prevented a more severe external crisis. Despite geopolitical tensions, inflows from overseas Pakistanis have remained strong. But relying indefinitely on remittances to offset structural economic weaknesses is not sustainable. Primarily private household transfers, remittances are not a substitute for productive investment or export growth. The broader concern that we may again be drifting towards the cycle of temporary stabilisation followed by renewed external pressure remains.

Without reforms to improve investor confidence, expand domestic productivity and exports, reduce dependence on consumption-led imports and create a predictable policy environment, the economy will stay trapped in recurring balance-of-payments crises.

Published in Dawn, May 21st, 2026