Pakistan’s trade deficit surges 25% to nearly $4 billion in July 

Pakistan's trade deficit expanded sharply during the first month of the new fiscal year, reaching nearly $4 billion in July,

ISLAMABAD: Pakistan’s trade deficit expanded sharply during the first month of the new fiscal year, reaching nearly $4 billion in July, as a strong rise in imports continued to outpace export growth, highlighting persistent weaknesses in the country’s external sector despite a series of incentives announced for exporters.

According to the latest figures released by the Pakistan Bureau of Statistics (PBS), the country’s trade deficit widened to $3.95 billion in July 2026, compared to $3.16 billion recorded during the same month last year. The deficit increased by approximately $794 million, representing an annual rise of 25.2%.

The widening gap was primarily driven by a substantial increase in imports, which climbed to $6.9 billion from $5.8 billion in July 2025. This reflects an increase of more than $1 billion, or 18% year-on-year, indicating stronger demand for imported goods and raw materials.

Exports Show Growth but Remain Below Key Milestone

While Pakistan’s exports registered positive growth, they once again failed to cross the important $3 billion monthly mark. Exports reached $2.94 billion, falling short of the milestone by around $61 million.

On an annual basis, exports increased by 9.5%, adding nearly $256 million compared to July last year. Although the improvement reflects steady recovery in overseas shipments, analysts believe the pace remains insufficient to counter the rapid expansion in imports.

Exports had crossed the $3 billion threshold in January 2026, touching approximately $3.05 billion, but the country has been unable to maintain that level in the months that followed.

Tariff Reforms Under Scrutiny

The latest trade figures have renewed debate over Pakistan’s tariff liberalisation policy, introduced under broader economic reforms supported by international financial institutions, including the World Bank and the International Monetary Fund (IMF).

The government has gradually lowered tariff barriers to increase competition and integrate Pakistan more closely into global markets. However, economists argue that the economy was opened before domestic industries were provided with sufficient support to compete effectively.

Business leaders have repeatedly pointed out that exporters continue to face high energy prices, elevated financing costs, tax-related uncertainties and exchange rate volatility, all of which reduce their competitiveness in international markets.

Earlier projections by the World Bank had suggested that tariff reforms would increase exports by 14% while limiting import growth to around 7%. However, the latest figures suggest imports have grown much faster than anticipated, while export gains have remained comparatively modest.

Government Rolls Out Fresh Export Incentives

To strengthen export performance, the federal government has announced a series of financial support measures during the current fiscal year.

In the federal budget, Prime Minister Shehbaz Sharif reduced the minimum and advance tax on exporters to 1.25% and abolished the 10% super tax on export earnings in an effort to improve liquidity and encourage investment in export-oriented industries.

More recently, the government approved a Rs98 billion export support package aimed at improving competitiveness and increasing foreign exchange earnings.

Under the revised Export Finance Scheme (E-EFS), exporters will be able to obtain six-month working capital loans at an interest rate of 8.5%, with the government absorbing 5 percentage points of the financing cost. The subsidy for this component alone is estimated at Rs58 billion during the current fiscal year.

ECC Approves New Financing Facilities

The Economic Coordination Committee (ECC) has also expanded access to concessional financing by increasing the ceiling of the existing short-term financing portfolio from Rs1 trillion to Rs1.5 trillion.

In addition, the committee approved the launch of a new Long-Term Growth Financing Facility, allowing exporters to access loans at an interest rate of 2% for the first two years, followed by a fixed 5% rate for the subsequent eight years.

The government has also introduced a performance-based rebate scheme, effective from July 1, 2026, with an estimated annual allocation of Rs15 billion.

Under the programme, exporters recording annual export growth of up to 10% over the previous year will receive a rebate equal to 1% of the incremental export value, while exporters achieving growth exceeding 10% will qualify for a 2% rebate on additional exports.

Long-Term Challenges Persist

Despite successive incentive packages introduced over several decades, Pakistan continues to struggle with achieving sustained export-led growth. Industry observers note that no single Pakistani exporter has generated $1 billion in annual export earnings, underscoring the structural challenges facing the country’s export sector.

These challenges include limited product diversification, low industrial productivity, rising production costs, inconsistent policy implementation and insufficient value addition.

Monthly Performance Offers Some Relief

On a month-on-month basis, the trade data presented a more encouraging picture.

Exports increased by 31% in July compared to June, rising by approximately $697 million, while imports remained largely unchanged at around $6.9 billion.

As a result, the monthly trade deficit narrowed by nearly 15%, or around $709 million, compared with the previous month.