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Industrial growth, fiscal surplus, and rising remittances support recovery in early FY2026 despite climate disruptions.
BeNewz Report
Pakistan’s economy has shown early signs of stabilization and moderate recovery during the first two months of FY2026, despite being battered by severe floods since July. According to the Monthly Economic Update & Outlook issued by the Finance Division here on Tuesday, key indicators—including industrial production, inflation, exports, and fiscal balance—have remained resilient, providing a cautiously optimistic outlook for sustainable growth in the months ahead.
Large-Scale Manufacturing (LSM), one of the critical drivers of industrial performance, posted a strong recovery with 9% year-on-year growth in July 2025 and a 2.6% increase month-on-month. Major contributors to this uptick included the textile, automobile, and cement sectors. Cement dispatches reached 7.847 million tonnes in Jul-Aug FY2026, a 20.9% increase compared to last year, while automobile production surged, with car manufacturing jumping by 100.9%, and production of trucks, buses, and pick-ups also recording significant gains.
Inflation, which was a major concern in FY2025, showed a marked decline. The Consumer Price Index (CPI) inflation dropped to 3.0% in August 2025, down from 9.6% in the same month last year. The average inflation for the first two months of FY2026 now stands at 3.5%, compared to 10.4% during the same period last year. Month-on-month, prices fell by 0.6% in August, reversing the 2.9% spike seen in July. This easing is largely attributed to declining prices of perishable food items and a broader correction in commodity markets.
However, the floods have severely affected the agricultural sector, and damage assessments for Kharif crops and livestock are underway. In response, the government has declared nationwide climate and agriculture emergencies and increased agricultural credit disbursement by 19.5% to Rs. 404.2 billion. Imports of agricultural machinery also rose by 66.7%, signaling attempts to mitigate the adverse impact on crop cycles and food security.
Fiscal performance remains a bright spot. Pakistan recorded a primary surplus of Rs. 228.9 billion (0.2% of GDP) in July FY2026—an improvement over Rs. 107.1 billion (0.1% of GDP) last year. Net federal revenue grew 7.7%, supported by a 14.8% increase in tax revenues and a 23.9% surge in non-tax revenues. Total FBR collections during Jul-Aug FY2026 rose by 14.1% to Rs. 1,661.5 billion. While expenditures grew by 28.8% to Rs. 990.1 billion, the overall fiscal deficit was kept in check at 0.2% of GDP.
The external sector has also shown relative resilience. Exports during Jul-Aug FY2026 increased by 10.2% to $5.3 billion, with knitwear, garments, and bedwear leading the gains. Imports also rose by 8.8% to $10.4 billion, expanding the trade deficit to $5.1 billion. However, remittances provided critical support, rising 7% to $6.4 billion, largely from Saudi Arabia and the UAE. Foreign direct investment stood at $364.3 million, with power and financial services attracting the most capital. The country’s foreign exchange reserves stood at a healthy $19.8 billion as of 19 September, with $14.4 billion held by the State Bank of Pakistan.
On the monetary side, the State Bank maintained its policy rate at 11% in the latest Monetary Policy Committee meeting, citing moderate inflation and improved high-frequency economic indicators. The money supply (M2) contracted by 2.3%, while government borrowing saw a reversal, with Rs. 2.3 trillion retired during the period—reflecting tighter fiscal control.
The Pakistan Stock Exchange continued its bullish trend, with the KSE-100 Index climbing 9,227 points in August to close at 148,617. Market capitalization expanded by Rs. 952 billion to Rs. 17.65 trillion, signaling renewed investor confidence.
Meanwhile, emigration figures showed a decline. Only 51,444 workers were registered for overseas employment in August, down 18.7% from July. In contrast, domestic human development efforts accelerated. The Pakistan Poverty Alleviation Fund disbursed 17,583 interest-free loans worth Rs. 899 million in August, and the Benazir Income Support Programme launched a vocational training initiative targeting 3,000 beneficiaries.
On the global front, Fitch Ratings forecast global growth at 2.4% for 2025 and 2.3% for 2026, with emerging markets like Pakistan showing signs of catching up with developed economies. However, global inflationary pressures remain elevated, and volatility in commodity prices persists. The FAO Food Price Index in August was up 6.9% year-on-year, indicating potential risk for food-importing countries like Pakistan.
Despite the risks posed by flood-induced supply disruptions and external uncertainties, the overall macroeconomic environment in Pakistan appears stable. Continued fiscal discipline, industrial momentum, strong remittance inflows, and easing inflation are expected to support sustainable recovery in the coming quarters. Policymakers, however, will need to stay vigilant against climate risks and ensure social protection for the most vulnerable segments of society.
