IMF fourth review next major test

Pakistan's economic recovery is facing its first major test from a new wave of external pressures, with higher oil prices and renewed inflation threatening to erode some of the stability achieved over the past year. Still, amid the turbulence, key indicators from foreign exchange reserves and remittances to manufacturing activity and business confidence suggest that the economy is entering this difficult phase with stronger buffers and a firmer domestic base.

The latest KTrade Research Macro Chartbook based on July-August 2026 data noted that Pakistan's improved economic position was reflected in S&P Global's upgrade of the sovereign rating to "B" from "B-", with a stable outlook. The upgrade cited improved institutional stability, continued International Monetary Fund (IMF)-supported reforms and strengthening external financing buffers.

The stronger credit profile also helped Pakistan secure a record $3 billion Eurobond, comprising a $1.75 billion 5.5-year tranche at 7.5% and a $1.25 billion 10-year tranche at 7.9%. Aggregate orders approached $6 billion, underscoring improved investor appetite for Pakistan's external debt.

The next test will come from the IMF with its fourth review of the $7 billion Extended Fund Facility expected next month. The review is likely to focus on progress on structural conditions, including proposed amendments to the Pakistan Sovereign Wealth Fund law.

But the external environment has turned less favourable. Inflation accelerated sharply to 11.15% in August from 9.20% in July, primarily because the transport index surged 20.2% year-on-year and 3.41% month-on-month following daily adjustments in administered fuel prices amid elevated global oil prices. The latest reading reduced the real interest rate to just 0.2 percentage points, making the September 14 monetary policy decision particularly sensitive to the trajectory of the Middle East conflict and global crude prices.

The report highlights that the external account also showed pressure, with the current account recording a $328 million deficit in July and the goods trade deficit widening 17.4% year-on-year to $3.146 billion. Strong remittance inflows provided an important cushion, rising 13% year-on-year and 4.5% month-on-month to $3.631 billion. Foreign exchange reserves increased to $17.18 billion, while the rupee appreciated marginally to Rs277.47 per dollar by end-August.

It noted that banking activity remained mixed, with spreads narrowing to 5.71% as lending and deposit rates rose to 11.30% and 5.59%, respectively. Consumer credit remained strong, rising 25.5% year-on-year, led by record auto financing and higher construction loans. Meanwhile, fertiliser demand weakened, with urea and DAP offtakes falling 5% and 10%, while cement dispatches slipped 0.7% year-on-year to 4.04 million tonnes amid heavy rains, although exports increased.

Domestic indicators remain mixed

Domestic activity, meanwhile, showed a mixed but improving picture. Large-Scale Manufacturing (LSM) declined 3.48% year-on-year in June, although autos, other transport and machinery recorded strong gains. Cumulatively, LSM grew 4.98% in FY26. The HBL Pakistan Manufacturing index also edged up to 51.8 in August, its highest level since the Middle East war began.

Business confidence improved to 52.4 in July from 48.2 in June, although expectations for economic conditions over the next six months weakened. Consumer confidence remained subdued amid uncertainty surrounding the regional conflict.

Textiles poised for stronger earnings

The textile sector is heading into a more favourable earnings cycle, with AKD Securities expecting a sharp recovery in profitability in the fourth quarter of FY26. The sector is expected to benefit from recovering exports, wider gross margins and gains from the remeasurement of Sindh Infrastructure Development Cess (SIDC) provisions.

The report by Usama Rauf projects earnings across its covered textile universe to rise 47% year-on-year in 4QFY26, with revenue increasing 3%. The revenue recovery is expected to be driven mainly by higher exports, with Pakistan's value-added textile exports already recording 1% year-on-year growth during the quarter, according to Pakistan Bureau of Statistics (PBS) data.

Gross margins are projected to expand to 16.3% from 15.7% a year earlier, supported by higher volumes and lower energy and input inventory costs. Other income is expected to increase substantially, mainly on potential gains from the remeasurement of SIDC provisions following negotiations with the Sindh government.

AKD retains an overweight view on the textile sector, identifying improving exports, reduced energy costs and easing interest rates as key supports for earnings. These factors could give exporters greater scope to rebuild margins after a difficult period.

The report maintained its "BUY" stance on Interloop Limited (ILP), Nishat Mills Limited (NML) and Nishat Chunian Limited (NCL), with December 2026 target prices of Rs150, Rs318 and Rs84 per share, respectively. The positive view is underpinned by expectations of stronger earnings, improving exports, wider margins and lower energy and financing costs.

The sector nevertheless remains exposed to the Middle East conflict, which could affect export flows and raise shipping and input costs. For now, however, the combination of stronger exports, lower costs and improving margins points to a more favourable profitability cycle for textiles.