The economic growth prospects have improved in Pakistan, as real GDP growth is now projected in the range of 3.75 – 4.75 percent for FY26, with expected growth to increase further in FY27, according to the bi-annual Monetary Policy Report released by the SBP.
Pakistan’s economy is currently in a much better position to withstand the potential negative fallout from adverse global developments, given the buildup in fiscal and external buffers over the past couple of years.
Economic activity has gained significant momentum, with real GDP growth strengthening to 3.7 percent in Q1-FY26, against the modest growth of 1.6 percent in Q1-FY25. The industry and agriculture sectors rebounded notably in the wake of a relatively stable cost of production, along with favorable supply-side dynamics and easing financial conditions. Importantly, the recovery in agriculture remained resilient despite some flood disruptions.
LSM has posted a notable recovery so far during FY26, after a contraction last year. Importantly, the LSM growth has been broad-based, with strong production particularly noted in automobiles, coke and petroleum products, wearing apparel (HVA textiles), and construction-allied industries.
This improvement points to strengthening demand conditions and easing supply-side constraints, as also reflected by improving business confidence, contained inflationary pressures, and higher imports of key intermediate and capital goods, which have all supported production activity.
This resilience is a result of the prudent and coordinated monetary and fiscal policies, which are facilitating a more sustainable pickup in economic growth without adding undue pressure on inflation and the external account.
Nonetheless, it is important to pursue productivity-enhancing structural reforms to increase exports and to privatize loss-making state-owned enterprises (SOEs) to achieve higher growth on a sustainable basis, according to the report.
The report noted that macroeconomic conditions and the outlook have improved, supported by a prudent monetary policy stance and continued fiscal consolidation. Inflation is projected to remain within the 5 – 7 percent target range during most of FY26 and FY27, despite some near-term volatility.
Economic activity has also strengthened, amidst ongoing macroeconomic stabilization, ease in financial conditions, and the recent reduction in the Cash Reserve Requirement to 5 percent.The report also underscored evolving risks to the macroeconomic outlook.
While risk of widespread impact from the recent floods have receded, uncertainty from global tariff-related developments persists, alongside volatility in global commodity prices.
Domestically, challenges from below-target revenue collection and impact of potential adverse climate events remain sources of vulnerability for the outlooks of inflation, external account and GDP growth.
In this context, it is important to speed up the progress on structural reforms to increase the economy’s resilience to adverse shocks, and to improve productivity and plug losses of state-owned enterprises, the report added.