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Pakistan's Economic Crisis Deepens as Geopolitical Risks Escalate in 2026

Pakistan's economic outlook is deteriorating as geopolitical headwinds re-emerge, with key support from allies like the UAE and China faltering. Friction with the UAE is evident in costly deposit rollovers, while Chinese investment and debt renegotiation for the power sector have stalled. The country's diplomatic rapport with the Trump administration is losing value as the US secures better trade terms with regional competitors like India and Bangladesh. Compounding these issues, the State Bank's foreign exchange reserves are being outpaced by growing external debt, and critical projects like Reko Diq face indefinite delays due to security concerns.

Key Points: Pakistan Economic Woes Mount with Rising Geopolitical Risks

  • UAE ties strained over deposit rollovers
  • Chinese CPEC Phase-2 on back burner
  • US trade deals favor India and Bangladesh
  • SBP reserves lag behind debt growth
  • Reko Diq project delayed by security issues
3 min read

'Pakistan's economic woes likely to mount as geopolitical risks rise'

Pakistan faces mounting economic challenges as UAE and China support wanes, US relations cool, and debt outpaces reserves, signaling a tough 2026.

"Most importantly, the government's warm and cordial terms with the Trump administration is losing its charm. - Business Recorder report"

New Delhi, Feb 18

Pakistan's economic situation is likely to start unfolding negatively in 2026, as geopolitical headwinds appear to be re-emerging, according to media reports.

There is visible friction in Pakistan-UAE ties, evident from the monthly rollover of UAE deposits at a higher rate of 6.5 per cent, when the government had previously been confident of a two-year rollover at half the rate. Potential UAE investment in Fauji Foundation companies also remains in limbo, according to an article in the Karachi-based Business Recorder.

There has been radio silence on any incremental economic support from China. CPEC Phase-2 is completely on the back burner. There is little hope of renegotiating Chinese power sector debt, as the refusal by Chinese IPPs to waive late payment surcharges is delaying the settlement of the power sector circular debt stock, despite banks agreeing to lend at sub-Kibor rates, the article stated.

It also highlights growing security concerns in Balochistan have now delayed the Reko Diq financial close indefinitely, despite it being touted as a game-changer.

"Most importantly, the government's warm and cordial terms with the Trump administration is losing its charm. The US has closed a trade deal with India at tariffs better than those for Pakistan. Bangladesh has also revised its tariff arrangement with the US to achieve zero duty on textile products while importing cotton from the US. Other countries continue engaging with the US and the rest of the world, while we bask in the high of being close to Trump," the report added.

It also observes that State Bank of Pakistan's (SBP) foreign exchange reserves at $4.3 billion were less than the uptick in external public debt and liabilities at $7.2 billion during 2025. External debt growth, therefore, outpaced reserves building by nearly $3 billion, even as the current account deficit remained a mere $0.2 billion for the calendar year.

SBP's purchases of $5.2 billion from the interbank market during January to October 2025 were not enough to help raise reserves net of the increase in debt and liabilities.

The SBP is responsible for arranging dollars for servicing government debt (principal and mark-up). This compels the SBP to buy virtually all surplus dollars arriving at bank treasuries, preventing banks from freely trading forex. This occurred despite commodity price tailwinds favouring the economy, as oil prices dipped by 15 per cent in 2025, the article points out.

FDI remained abysmally low, and the same fate befell other external inflows (barring debt). There have been talks of investment and debt from friendly countries for three years, yet little has materialised so far, the article added.

- IANS

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Reader Comments

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Priya S
The numbers are truly alarming. When your external debt grows faster than your reserves, you're essentially borrowing just to pay off old debt. It's a vicious cycle. The common people there will suffer the most due to inflation and lack of opportunities. Very sad situation indeed. 😔
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Aman W
The CPEC being on the back burner is the biggest tell. It was supposed to be their economic lifeline. When even strategic partners like China are hesitant to pour more money in, it sends a very strong signal to all other potential investors. Security issues in Balochistan stopping Reko Diq is another massive blow.
S
Sarah B
From a purely economic perspective, this is a textbook governance failure. The central bank buying all surplus dollars to service debt cripples the forex market and stifles genuine trade. They had the tailwind of lower oil prices and still couldn't capitalize. It highlights deep structural issues beyond just geopolitics.
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Karthik V
While the situation is concerning for our neighbour, we must focus on our own growth and stability. India's recent trade deal with the US mentioned in the article is a positive step. We should continue engaging with the world pragmatically, not emotionally. A stable neighbourhood is in everyone's interest, but our primary duty is to our own citizens first.
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Nikhil C
The part about "basking in the high of being close to Trump" is so accurate. Foreign policy based on personal chemistry with foreign leaders is volatile and yields little. Meanwhile, Bangladesh quietly revises its tariffs and gets zero duty! Real diplomacy is about securing tangible benefits for your people, not photo-ops.

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