Pakistan macroeconomic buffers improve, but external financing risks persist

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Pakistan macroeconomic buffers, risks

Highlights

Pakistan’s foreign exchange reserves reached $21.4 billion in late September 2026, recovering from below $3 billion in early 2023 but still only near minimum import cover levels.
The current account deficit increased to $874 million for July–September 2026 from $755 million a year earlier, as imports outpaced exports and remittance inflows remain fragile.
A $3 billion dual-phase Eurobond was issued at 7.5% and 7.9% yields, but contingent liabilities—such as 498 billion rupees to Chinese IPPs and 2 trillion rupees in energy debt—remain off-balance-sheet fiscal risks.

Central bank highlights post-2023 stabilisation

As reported by Business Recorder, citing a State Bank of Pakistan statement, Governor Jameel Ahmed says Pakistan’s macroeconomic conditions and external buffers have improved, in remarks delivered on the sidelines of the International Monetary Fund and World Bank annual meeting in Bangkok at an event organized by major international banks.

The governor points to gains made after 2023, including stronger growth, higher foreign exchange reserves and regulatory reforms by the central bank. He also links reserve accumulation to SBP purchases, a balanced current account and changes affecting exchange companies and official remittance inflows.

The backdrop remains Pakistan’s severe 2023 stress, when interference in the foreign exchange market and an unsustainable official dollar-rupee rate contributed to multiple exchange rates, a sharp fall in remittances and reserves dropping below $3 billion in early 2023. That period also led to disruption of the IMF loan programme and a subsequent nine-month Stand-By Arrangement tied to ending market intervention and implementing regulatory reforms.

Rising deficit and debt structure cloud outlook

Foreign exchange reserves stand at $21.4 billion as of late September, but that level is still only around the minimum import cover sought by international donor agencies, with pressure from higher global oil prices, limits to trade with Gulf countries because of the ongoing conflict in West Asia and the Russia-Ukraine war.

Trade and external accounts remain under strain. Exports are rising more slowly than imports, and Pakistan’s recurring boom-bust pattern in the current account continues to reflect import controls that curb deficits but also weaken output dependent on raw materials and semi-finished goods. The current account deficit for July to September 2026 rises to $874 million from $755 million a year earlier.

IMF guidance continues to stress exchange-rate flexibility, reserve accumulation, gradual liberalisation of the foreign exchange regime and deeper domestic financial markets. At the same time, foreign direct investment remains modest at $1,672.3 million last fiscal year, while portfolio investment is negative $1,186 million, leaving net inflows of only $486.1 million and underscoring why Pakistan remains below investment grade.

The decline in the public debt-to-GDP ratio also comes with financing trade-offs. The text argues that part of the reduction reflects a shift from short-term to longer-term debt at higher interest rates, including a recently issued dual-phase $3 billion Eurobond carrying yields of 7.5% for five and a half years on $1.75 billion and 7.9% for 10 years on $1.25 billion. It also notes that liabilities such as 498 billion rupees due to Chinese IPPs and more than 2 trillion rupees in circular energy debt are not included in public debt, leaving fiscal risks in place.

In our earlier article on Pakistan’s push to expand priority-sector lending, we covered the government’s drive to widen credit access for households, farmers and small businesses through higher targets for housing finance, farm credit and SME lending through 2027. The piece also outlined steps to strengthen banks’ capacity to lend, including regulatory adjustments, risk-sharing arrangements and public-private partnerships aimed at easing structural barriers to formal credit.

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