NEW DELHI — Pakistan’s fragile economic outlook is expected to deteriorate further in 2026 as geopolitical risks resurface and key external partnerships show signs of strain, according to media reports.
An analysis published by the Karachi-based Business Recorder points to growing friction in Pakistan’s relationship with the United Arab Emirates, reflected in the monthly rollover of UAE deposits at a higher interest rate of 6.5 percent. The government had earlier anticipated a two-year rollover at roughly half that rate. Prospective UAE investment in Fauji Foundation-linked companies has also stalled, the report said.
Support from China appears to have slowed as well, with no indication of additional economic assistance. The second phase of the China-Pakistan Economic Corridor remains on hold, while hopes of renegotiating Chinese power sector debt have faded. The refusal by Chinese independent power producers to waive late payment surcharges has delayed efforts to resolve circular debt in the power sector, despite Pakistani banks agreeing to lend at below Kibor rates.
Security concerns in Balochistan have further complicated matters, with instability in the region pushing the financial close of the Reko Diq project into indefinite delay, despite earlier projections that it would be a major economic catalyst.
The report also suggests that Pakistan’s diplomatic positioning may be yielding diminishing economic returns. It notes that the country’s previously warm ties with the Trump administration are losing momentum, particularly as the United States has finalized trade arrangements with India at more favorable tariff levels. Bangladesh, meanwhile, has revised its tariff framework with Washington to secure zero-duty access for textile exports while increasing cotton imports from the U.S.
On the financial front, the State Bank of Pakistan’s foreign exchange reserves stood at $4.3 billion, while external public debt and liabilities rose by $7.2 billion during 2025. As a result, the increase in debt outpaced reserve accumulation by nearly $3 billion, even though the current account deficit remained limited at $0.2 billion for the year.
The central bank’s purchases of $5.2 billion from the interbank market between January and October 2025 were insufficient to offset the rise in external debt and liabilities. The report said the SBP’s responsibility for sourcing dollars to service government debt has forced it to absorb most surplus foreign currency from banks, limiting free forex trading.
These pressures persisted despite favorable global commodity trends, including a 15 percent drop in oil prices during 2025. Foreign direct investment remained weak, and other non-debt inflows were similarly subdued. Although Pakistan has held discussions on potential investment and financing from friendly countries for several years, the report noted that little tangible progress has been made. (Source: IANS)
