Economy enters FY26 with stronger outlook

Pakistan's economy has entered fiscal year 2025-26 with positive momentum, building on last year's gains and setting an optimistic tone for the months ahead, supported by a stronger external and fiscal position, the finance ministry said in its August update released Thursday.

"Pakistan's economy started FY2026 with positive developments from the sustained improvements in FY2025 and set a promising tone for the months ahead," the Monthly Update and Outlook for August 2025 noted.

The report said investment facilitation measures, reforms to promote private sector-led growth, easing inflation, and accommodative monetary policy are likely to reinforce business confidence. A favourable global environment, stronger demand from trading partners, and Pakistan's recent trade deal with the US are expected to boost exports, while remittances will help offset import pressures from tariff rationalisation.

However, flood-related damages could add fiscal pressures and disrupt food supplies. Inflation is projected to remain within 4%-5% in August 2025. CPI inflation was recorded at 4.1% YoY in July, compared to 3.2% in June and 11.1% in July 2024. On a monthly basis, inflation rose 2.9% in July, after a 0.2% increase in June.

The external sector performed well in July FY2026, with a narrower current account deficit and a stable exchange rate. The FBR also recorded strong tax growth. These trends highlight stable macroeconomic foundations, with international credit rating agencies upgrading Pakistan's sovereign outlook on the back of sustained improvements.

Agricultural credit disbursement rose 16.3% to Rs. 2,577.3 billion in FY2025, while agricultural machinery imports jumped 123.9% to $14.4 million in July. The Large-Scale Manufacturing sector grew 4.1% YoY in June, though it fell 3.7% month-on-month. For FY2025, LSM output declined 0.74%, compared to a 0.78% rise last year.

The fiscal deficit narrowed to 5.4% of GDP in FY2025 from 6.9% in FY2024, the lowest in eight years. The primary surplus rose to Rs. 2,719.4 billion (2.4% of GDP), the highest in 24 years, supported by restrained non-markup expenditures. Expenditure grew 18% to Rs. 24,165.5 billion, while federal PSDP allocations increased 43.3%. Tax revenues rose 26.2%, and non-tax revenues surged 65.7%.

In July FY2026, FBR's tax collection increased 14.8% to Rs. 757.4 billion. The current account deficit narrowed to $254 million from $348 million last July. Exports rose 16.2% to $2.7 billion, while imports grew 11.8% to $5.4 billion.

On July 30, the Monetary Policy Committee kept the policy rate unchanged at 11%, noting a slight uptick in the inflation outlook due to higher energy prices.