Pakistan’s macroeconomic stability improved further during the first half of FY26 despite external pressures from global trade uncertainty and domestic flooding, according to the State Bank of Pakistan’s “State of Pakistan’s Economy: Half Year Report FY26”.
The report also warns that ongoing tensions in the Middle East pose significant risks to the outlook, with potential disruptions to supply chains that could affect inflation, trade flows, remittances, and overall economic activity.
The report highlights broad-based improvement in key economic indicators during H1 FY26. Inflation continued to ease, while foreign exchange purchases by the State Bank and stronger financial inflows helped strengthen external reserves.
These gains were supported by cautious monetary policy, fiscal discipline, structural reforms, stable commodity prices, and continued support from the IMF program. The fiscal balance also recorded a surplus during the period, marking improved macroeconomic management.
Real GDP growth in H1 FY26 doubled compared to the same period last year, driven mainly by stronger industrial activity, followed by growth in services and agriculture. This recovery led to higher import volumes, while weaker rice exports reduced overall export earnings.
However, rising workers’ remittances helped offset external pressures by financing a large portion of trade and income deficits, keeping the current account deficit at manageable levels.
Inflation also eased during the period, averaging 5.2 percent, about two percentage points lower than last year. The decline was supported by stable exchange rates, softer global commodity prices, lower electricity tariffs, and continued policy restraint. Fiscal consolidation and reduced debt servicing costs also helped turn the fiscal balance into a surplus for the first time since FY2002, while the primary surplus remained steady.
The report stresses that Pakistan’s shift toward sustained high growth will require deep structural reforms. Key challenges include low savings and investment, weak export competitiveness, declining foreign direct investment, and a persistently low tax-to-GDP ratio.
The report also includes a special focus on climate change, noting that although Pakistan contributes minimally to global emissions, it remains among the most climate-vulnerable countries. The country’s high emissions intensity and low preparedness further increase economic risks, while limited climate financing continues to restrict adaptation and mitigation efforts.
Looking ahead to FY26, the SBP expects economic momentum to continue but at a slightly slower pace due to external shocks, particularly geopolitical tensions.
Growth is now projected near the lower end of the earlier forecast range of 3.75 to 4.75 percent. Inflation is expected to remain above the upper limit of the 5–7 percent target range in FY27, mainly due to rising global oil prices and commodity pressures.
