Pakistan's current account recorded a deficit of $139 million for fiscal year 2025-26, a sharp reversal from the $1.838 billion surplus posted in the previous year, according to data released Friday by the State Bank of Pakistan. The narrow annual deficit belied a tumultuous monthly swing, with June alone posting a $649 million shortfall after a surplus of $500 million in May. Main Developments Three of the four fiscal quarters ended in deficit: Q1 saw a $737 million shortfall, Q2 recorded $624 million, and Q4 posted $425 million. Only the third quarter produced a significant surplus of $1.647 billion, which kept the full-year deficit negligible. Remittances proved crucial, rising to $41.585 billion in FY26 from $38.3 billion the prior year—an increase of roughly $3.3 billion. Goods exports, however, fell to $30.843 billion from $32.434 billion, while services exports grew to $10.034 billion from $8.45 billion, resulting in marginal overall export growth of just $84 million. Read also: Pakistan Panel to Assess High-Paid Tax Tribunal Hires Amid Backlog Separately, foreign direct investment (FDI) dropped 34% to $1.637 billion in FY26 from $2.477 billion in FY25, a decline of $840 million. China remained the largest source, contributing $862 million, down from $1.205 billion the previous year. Inflows from the Middle East, mostly pre-war investments, also fell short of FY25 levels. Background The current account had posted a surplus of $1.838 billion in FY25, with June 2025 alone showing a $220 million surplus. The Gulf war, which erupted on February 28, disrupted oil prices and had been widely expected to push the account into deficit. Despite the conflict, the annual shortfall remained contained largely due to remittance strength. Imports remained elevated, creating a trade deficit exceeding $35.5 billion in FY26. The total import bill stood at $76.4 billion, though oil imports did not consume the majority of foreign exchange. Pakistan relies on imported fuel for roughly 70% of its energy needs. Why It Matters The swing from surplus to deficit underscores Pakistan's vulnerability to external shocks, particularly the Gulf war's impact on oil prices and regional stability. If the conflict continues or expands, the country could face significantly higher foreign exchange spending on oil imports, eroding the gains from remittances. The simultaneous decline in FDI, already acute for over a decade, further limits the economy's ability to attract long-term investment and reduce external pressure. Economic and political analysts monitoring the Gulf situation fear the conflict could involve more nations, potentially disrupting remittance flows in FY27. Higher oil prices would make it harder for Pakistan to maintain stable growth while managing its external accounts. What's Next The Gulf war's trajectory will heavily influence Pakistan's current account in FY27. If the conflict persists, the oil import bill is expected to rise sharply, while remittance inflows—the main buffer—could weaken. The State Bank will continue to monitor the situation, and the government may need to seek additional external financing or adjust import policies to manage the deficit. With FDI already depressed, the outlook for capital inflows remains uncertain.