Soaring trade gap emerges as black hole for dollars

KARACHI: The foreign exchange reserves of the State Bank are inching close to the target of $18 billion for current fiscal year (FY26), but a widening trade deficit threatens to erase the growth in reserves and remittances. Data issued by the central bank on Thursday showed that the forex reserves increased by $43 million to $17.2bn during the week ending on May 29. Financial experts see the improvement in reserves as a good sign, but at the same time they fear the widening trade imbalance would lead to a large current account deficit this fiscal year. They also pointed out that substantial payments to foreign creditors are due this month. SBP forex reserves are nearing their annual target, but large payments are also due this month June which means still a month is available to the SBP to catch the target of $18bn. The State Bank has been purchasing dollars from the inter-bank market to improve reserves and make external payments, while the exchange rate is being managed through a steady uptick in the rupee’s value against the dollar. “More important is the managed exchange rate, which may burst after June after large payments are made before the end of the fiscal year on June 30,” said Atif Ahmed, a currency expert. He added that since the dollar has been appreciating against all regional currencies except Pakistan’s, it is obvious the rupee is under depreciation pressure. According to Atif, the purchase of dollars from the inter-bank market by SBP makes no difference to the dollar rates since the price mechanism in banking market does not exist anymore. “The rate is determined by the central bank.” Alarming deficit Financial experts said the growing trade deficit would affect both the exchange rate and the current account deficit. The current account had a surplus of $1.8bn in FY25. “The trade deficit for the 11 months of FY26 has soared to $35bn, which is seen as alarming by economic managers of the country. It will definitely take the current account deficit to