Analyzing Pakistan’s Current Account Deficit: Causes and Solutions
Pakistan’s economy has long faced external imbalances, with the current account deficit (CAD) standing out as a major macroeconomic challenge. Widening CADs have triggered currency depreciation, IMF interventions, and fiscal strain. Understanding the root causes and implementing sustainable policy solutions is crucial for restoring economic stability and investor confidence.
This article analyzes the key drivers of Pakistan’s CAD, outlines its economic consequences, draws comparative lessons from peer economies, and proposes strategic reforms to address the imbalance.
Understanding the Current Account Deficit
What is the Current Account?
The current account is part of a country’s balance of payments. It records the net flow of goods, services, income, and unilateral transfers between residents and the rest of the world. A deficit occurs when imports and payments exceed exports and inflows.
Pakistan’s External Position
Pakistan’s current account deficit highlights structural vulnerabilities such as:
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Heavy reliance on imports
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A narrow, low-value-added export base
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Inconsistent remittance inflows
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Rising external debt servicing needs
Historical Context of Pakistan’s Current Account Deficit
Over the past two decades, Pakistan has experienced repeated episodes of large current account deficits, followed by IMF-supported adjustments. The fiscal year 2017–18 saw the deficit rise above 6% of GDP, driven by import surges and stagnant exports. Temporary improvements through austerity measures or short-term inflows have often been reversed due to global shocks and domestic policy lapses.
Events such as the COVID-19 pandemic, global oil price hikes, and the Russia-Ukraine conflict further exposed the fragility of Pakistan’s external account.
Key Causes of Pakistan’s Current Account Deficit
1. Persistent Trade Imbalance
Pakistan consistently imports more than it exports. Major imports include:
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Crude oil
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Machinery
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Food and pharmaceuticals
Exports remain limited to a few traditional sectors (e.g., textiles, rice, leather), with minimal value addition and limited market diversification.
2. Import Dependency
Pakistan’s industries and agriculture rely heavily on imported inputs such as:
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Fertilizers
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Diesel
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Edible oils
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Agricultural machinery
This structural dependency increases vulnerability to external shocks.
3. Weak Export Competitiveness
Exports are constrained by:
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High energy costs
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Inefficient logistics
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Lack of innovation
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Policy inconsistency
Potential high-growth sectors like IT, engineering, agro-processing, and pharma remain underdeveloped.
4. External Debt Servicing
Pakistan holds over $125 billion in external debt, requiring continuous foreign currency outflows for repayments. This adds pressure on reserves and weakens the current account.
5. Fluctuating Remittances
Remittances, especially from Gulf countries, play a stabilizing role but have shown recent volatility. Informal channels like hundi and hawala divert inflows away from the formal economy.
6. Exchange Rate Management
Pakistan has historically maintained an overvalued exchange rate, which:
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Reduces export competitiveness
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Encourages imports
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Leads to sudden devaluations when unsustainable
Recent reforms aim for a market-based exchange rate, but challenges remain.
7. Low National Savings and Investment Gap
A savings rate below 13% of GDP limits domestic financing. High investment needs—especially in infrastructure—require foreign borrowing, widening the CAD.
Consequences of a Widening Current Account Deficit
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Currency Depreciation: Increased demand for dollars weakens the rupee.
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Imported Inflation: Higher costs for imported fuel, food, and essentials.
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Declining Reserves: Lower ability to pay for imports or service debt.
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Higher External Borrowing: Leads to greater debt burdens.
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Reduced Investor Confidence: Triggers capital flight and drops in FDI.
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Tighter Monetary Policy: Central banks raise interest rates, dampening growth.
In extreme cases, unsustainable CADs lead to balance-of-payments crises, requiring emergency funding and austerity from lenders like the IMF.
Comparative Insights: Lessons from Other Economies
Bangladesh
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Focused on export diversification (textiles, garments)
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Strengthened trade agreements and built infrastructure
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Developed a skilled labor force
Vietnam
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Moved into electronics and high-value exports
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Embraced trade liberalization and macroeconomic stability
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Attracted long-term FDI
Ethiopia
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Invested in infrastructure and public-private partnerships
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Built industrial parks and logistics zones to support exports
These countries show the importance of consistency in policy, industrial transformation, and investment in competitiveness.
Evaluating Government Responses and IMF Measures
Pakistan has often responded to CAD crises with:
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Import restrictions
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Tariff hikes on non-essential goods
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Monetary tightening
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Exchange rate adjustments
While helpful in the short term, such measures are not substitutes for structural reforms. IMF programs often bring stability but require deeper institutional changes to be sustainable.
Strategic Solutions for Sustainable CAD Correction
Promote Export Diversification
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Incentivize sectors like IT, pharmaceuticals, and engineering
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Invest in infrastructure, trade facilitation, and logistics
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Enhance quality standards and global market access
Reduce Import Dependence
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Encourage domestic production of critical inputs
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Support local value chains and SMEs
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Implement targeted import substitution
Strengthen Remittance Flows
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Improve formal transfer systems
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Offer tax incentives and digital platforms
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Build trust and service quality for overseas Pakistanis
Improve Exchange Rate Flexibility
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Maintain a market-determined currency
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Avoid artificial interventions
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Build foreign exchange buffers through reserves and exports
Enhance National Savings
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Promote financial inclusion and domestic investment
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Deepen capital markets and offer saving instruments
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Rationalize public expenditure and reduce fiscal deficits
Conclusion
Pakistan’s current account deficit is a symptom of deep-rooted structural issues. Addressing it requires more than short-term fixes—it calls for bold, long-term reforms. Export promotion, debt sustainability, savings mobilization, and a competitive exchange rate regime are essential to building a resilient external sector.
By learning from successful models and committing to policy consistency, Pakistan can overcome its CAD challenges and lay the foundation for sustainable economic growth.
About Us
Usman Rasheed & Co Chartered Accountants is a leading financial advisory and audit firm in Pakistan, having offices in Islamabad, Quetta, Lahore, Karachi, Peshawar & Gilgit. The firm is providing Audit, Tax, Corporate, Financial, Business, Legal & Secretarial Advisory services and other related assistance to local and foreign private, public and other organizations working in Pakistan