Recovery reliant on imports not exports
Pakistan's economic recovery remains heavily dependent on domestic consumption, imports and remittance inflows rather than exports and productive investment, with the State Bank of Pakistan (SBP) warning that deep rooted structural weaknesses continue to threaten sustainable growth.
"It has become imperative to move towards an export oriented and investment led growth model," the SBP stated in its Half-Year Report on the State of Pakistan's Economy FY26. The central bank said macroeconomic stability improved during the first half of the fiscal year as GDP growth accelerated to 3.8%, inflation eased and foreign exchange reserves rose to $16.1 billion. However, the recovery was largely driven by industrial activity, consumer demand and overseas inflows instead of export competitiveness or productivity gains.
The SBP noted that large scale manufacturing rebounded after three years of contraction, led mainly by automobiles, textiles and petroleum products. Auto sales surged due to lower borrowing costs, stable prices, promotional discounts and the launch of new SUV variants, while construction activity gained momentum because of higher development spending and concessional housing schemes.
But despite improving domestic demand and global trade recovery, Pakistan's exports declined during the first half of FY26, primarily because of lower rice exports, weak diversification and declining competitiveness. The report said imports rose sharply across machinery, transport and metals groups following tariff rationalisation under the National Tariff Policy 2025 30, widening the trade deficit by nearly 36%.
The central bank admitted that Pakistan remains trapped in a cycle of low productivity, weak competitiveness and falling exports relative to GDP. "The downtrend in exports is due to a host of structural issues, including low productivity, policy inconsistencies, weak integration with global value chains, and lack of products and market diversification," the report stated.
According to the SBP, the economy continues to rely heavily on workers' remittances to finance external deficits. Remittances reached $19.7 billion in the first half of FY26 and remained the primary factor supporting foreign exchange reserves and exchange rate stability despite weak export earnings. Remittances have reached almost $38 billion in the 10 months of FY2026.
The report also highlighted growing dependence on migration related income, saying recent Household Integrated Economic Survey (HIES) findings showed that non labour income, particularly remittances and transfers, was becoming increasingly important for household survival.
The SBP warned that economic gains remained uneven, with poorer households benefiting less from the recovery. The HIES data pointed to widening disparities in income and consumption, reflecting an unequal distribution of economic gains across income groups. Foreign direct investment also remained concentrated in low risk and market seeking sectors such as fast moving consumer goods (FMCGs), automobiles and power instead of export oriented industries. The central bank blamed weak project preparation, policy inconsistency, governance gaps and financial sector weaknesses for discouraging productive investment.
The report stressed that Pakistan must transition towards an export oriented and investment led growth model to sustain long term recovery. It said reforms aimed at improving governance, deregulation, trade liberalisation, labour markets and access to credit were essential for raising productivity and competitiveness.
On inflation, the SBP said overall consumer inflation eased to 5.2% in the first half of FY26 due to lower energy prices and exchange rate stability, but core inflation remained stubbornly high. The central bank made a rare observation that corporate profit margins had contributed to persistent inflationary pressures. "Firms in some sectors increased product prices despite falling input costs," the report said while discussing elevated core inflation.
Meanwhile, private sector credit growth collapsed to just 0.9% year on year by December 2025, compared with 22.8% a year earlier, indicating weak business investment appetite despite lower interest rates.
The SBP also identified climate change as an emerging macroeconomic threat, warning that floods, rising temperatures and supply disruptions were already affecting growth and inflation while exposing Pakistan's weak preparedness for climate adaptation.
"Improvement in both the fiscal and current account balances signals that macroeconomic stabilisation efforts are beginning to yield results," said Waqas Ghani Kukaswadia, Research Head of JS Global. "The real test now is whether policymakers can convert this temporary stability into sustainable growth through structural reforms, export competitiveness and stronger investment confidence."