Pakistan’s economy appears to be heading towards a new difficult phase. The current account deficit has resurfaced amid persistent weaknesses in the external sector, particularly the balance of payments.
This vulnerability, which appears to be rooted in the country’s structural imbalances, such as high dependence on imports, declining exports and exposure to external shocks, has long undermined Pakistan’s quest for sustainable growth.
Although short-term economic stabilization measures have helped the country in recent months, they have done little to address the deeper problems that continue to limit Pakistan’s economic potential.
Amid the US-Iran war, Pakistan’s external sector has once again highlighted the structural weaknesses of the economy. More importantly, the war and its economic consequences show that the problems that short-term economic solutions seemed to have solved have resurfaced today. The country remains very sensitive to geopolitical risks and changes in commodity prices. This conflict between the United States and Iran has already disrupted trade routes, increased energy costs and put increased pressure on foreign exchange reserves.
This comes at a time when investor confidence in Pakistan is already low. Recent data from the State Bank of Pakistan (SBP) highlights the seriousness of the situation. Importantly, foreign direct investment (FDI) in Pakistan fell by 31% in the first 10 months of FY2026. The country attracted only $1.409 billion between July and April of FY26, compared to $2.035 billion in the same period of the previous fiscal year. Additionally, governance concerns and political uncertainty, according to the central bank, continue to weigh heavily on foreign investor confidence.
On a cumulative basis, total foreign investment for the 10 months stood at a meager $31.7 million, compared to $1.46 billion for the same period last year. This stark contrast highlights the cautious stance taken by many international actors towards Pakistan.
Similarly, entries from other sources in the current financial year paint an equally mixed picture. For example, Hong Kong invested $281 million, followed by Switzerland and the United Arab Emirates with $170 million and $169 million, respectively.
It is worth noting that Chinese investments in Pakistan’s financial sector have resisted the downward trend. Its investments have provided Pakistan with an essential buffer to its external accounts. In April alone, inflows from China reached $61 million, surpassing the month’s net FDI total from all other countries. Additionally, over 10 months, China accounted for more than half of all inflows, which amounted to approximately $740 million. Although this figure represents a drop from $1 billion in the previous equivalent period, Chinese investment remains a vital source of capital for Pakistan at a time when many other investors have withdrawn sharply.
Arguably, Beijing’s continued engagement with Pakistan’s financial sector provides not only financing, but also a degree of stability in an otherwise volatile investment landscape. A positive development in this regard emerged earlier this month with the success of Pakistan’s inaugural Panda bond issuance in China’s domestic capital market. The country raised $250 million at a competitive fixed interest rate of 2.5 percent.
Khurram Schehzad, Advisor to Pakistan’s Finance Minister, described the successful issuance at a highly competitive rate as a testimony to Pakistan’s improving macroeconomic fundamentals, external stability, disciplined fiscal management and sovereign repayment capacity.
« The success of Panda Bond [debut] “This sends a powerful signal to global investors that Pakistan’s economic recovery is gaining international recognition,” he noted.
From Pakistan’s perspective, this inaugural issuance of Panda Bond represents an important step towards diversifying sources of financing and deepening integration with Chinese financial markets. Furthermore, it also speaks to Pakistan’s efforts to tap alternative capital reserves to those of its traditional Western or Gulf partners.
Meanwhile, foreign remittances have so far helped Pakistan avoid a deeper financial and external crisis. However, the idea of relying indefinitely on remittances to hide structural weaknesses is neither viable nor appropriate from a long-term resilience perspective.
Despite these positive developments in a very difficult period, the general situation related to FDI remains one of caution and restraint. It appears that investors are wary of political uncertainties, tax complexities, currency volatility and other associated risks. This essentially means that regaining broader investor confidence will require deeper structural reforms aimed at improving the ease of doing business, closing governance gaps, reforming taxation and, above all, moving towards an export-led growth model that reduces dependence on imports.
Ultimately, for Pakistan, the path forward depends on deep institutional reforms designed to reassure investors, while strengthening domestic capacity. Without these fundamental changes, Pakistan’s economy risks remaining trapped in a chronic cycle of stabilization efforts followed by structural vulnerability, leaving it constantly exposed to geopolitical shocks, external account pressures and global uncertainties that will continue to test its resilience.