Pakistan’s macroeconomic position improved further during the first half of FY26 despite challenges arising from global trade uncertainty and domestic flooding.
The State of Pakistan’s Economy Half-Year Report FY26, however, warned that the ongoing Middle East crisis poses serious risks to Pakistan’s economic outlook, as supply chain disruptions could affect inflation, trade activity, remittance inflows, and overall economic performance.
According to the SBP, key economic indicators showed marked improvement in H1-FY26. Average national inflation continued to decline, while foreign exchange purchases by the SBP and financial inflows helped strengthen external reserves. The report attributed the progress to prudent fiscal and monetary policies, structural reforms, favourable global commodity prices, and support under the IMF programme.
The SBP maintained a cautious monetary policy stance with a positive real interest rate on a forward-looking basis, while the fiscal account recorded a surplus during the first half of FY26. The improved macroeconomic environment also supported stronger economic growth.
Pakistan’s real GDP expanded at nearly double the pace recorded in the same period last year, mainly due to stronger industrial output, followed by growth in the services and agriculture sectors. Rising economic activity also pushed imports higher in volume terms during H1-FY26.
Meanwhile, export earnings declined because of a sharp fall in rice exports. However, growing workers’ remittances continued to offset deficits in trade, services, and primary income accounts, helping keep the current account deficit within manageable limits.
The report noted that lower international commodity prices, exchange rate stability, a stronger external account position, and cuts in administered electricity tariffs contributed to easing inflation. Average National CPI inflation stood at 5.2 per cent in H1-FY26, around two percentage points lower than the corresponding period last year.
It also highlighted that reduced interest payments and fiscal consolidation measures helped Pakistan post a fiscal surplus in H1-FY26 for the first time since FY02, while the primary surplus remained at last year’s level.
Despite improvements in overall economic conditions, the SBP stressed that Pakistan still needs deep structural reforms to achieve sustainable high growth with lasting macroeconomic stability. The report identified chronic weaknesses such as low savings and investment, weak competitiveness, declining exports, subdued foreign direct investment, and a persistently low tax-to-GDP ratio.
A special chapter in the report examined climate change and its impact on Pakistan’s economy. It noted that although Pakistan contributes minimally to global greenhouse gas emissions, it ranks among the countries most vulnerable to climate-related disasters and remains poorly prepared to tackle climate challenges.
The report added that Pakistan’s GDP emissions intensity remains high because of structural inefficiencies and carbon-intensive growth patterns. It stressed the need for major investments in climate adaptation and mitigation, which continue to face obstacles due to limited international climate financing and weak domestic funding capacity.
On the outlook for FY26, the SBP said high-frequency indicators such as the Purchasing Managers’ Index, Large-Scale Manufacturing, and construction activity suggested economic momentum remained intact until February 2026 before the Middle East war began affecting output in the remaining months of the fiscal year.
The SBP now expects real GDP growth to remain near the lower end of its earlier forecast range of 3.75 to 4.75 per cent for FY26. Despite higher commodity prices and improving economic activity, the current account deficit is projected to stay near the lower bound of the previously estimated range of 0 to 1 per cent of GDP.
However, the SBP warned that rising international oil prices and their spillover impact on other commodities could keep inflation above the medium-term target range of 5 to 7 per cent for much of FY27. The report also outlined broader macroeconomic risks that could emerge if the Middle East conflict is prolonged further.
SECP allows five brokerage firms to launch Islamic trading windows
