Pakistan’s macroeconomic performance over FY2025 and FY2026 reflects a statistically verifiable transition from stabilisation to recovery. During FY2025, macroeconomic imbalances — particularly high inflation, external account stress, and fiscal pressures — necessitated policy tightening. As a result, FY2026 (Jul–Mar) shows measurable improvements: inflation declined to 5–6 per cent, GDP growth reached 3.7 per cent in Q1, and the current account recorded a marginal surplus of $8 million. These outcomes are supported by coordinated fiscal and monetary policy, reflecting improved policy management under challenging global conditions.

Inflation: a major policy achievement

Inflation declined significantly, averaging 5.2 per cent during Jul–Dec FY2026 and 5.5 per cent during Jul–Feb, while YoY inflation stood at 7.0 per cent in February 2026. This disinflation reflects the impact of a 10.5 per cent policy rate, ensuring a positive real interest rate of approximately 4–5 per cent. The stabilisation of prices has reduced demand-side pressures and improved purchasing power, indicating effective inflation control. Continued policy discipline will be important to sustain this trend.

As shown in Table 1, inflation remained within a relatively narrow band during FY2026, indicating stabilisation following the volatility of the previous year.

Table 1: Inflation Trend | Source: MoF

Graph 1: Inflation Trend

Monetary policy

The policy rate remained at 10.5 per cent throughout FY2026, implying a positive real interest rate of approximately 4.8 percentage points based on average inflation of 5.2–5.5 per cent (Jul–Feb). This real rate differential appears to have contributed to the moderation in inflation to mid-single-digit levels during the fiscal year.

On the financial side, lower inflation reduced the erosion of real returns on deposits, supporting deposit mobilisation and liquidity expansion within the banking system. This, in turn, contributed to a pickup in private sector credit demand, particularly for working capital financing.

Monetary transmission is also reflected in real sector outcomes. Despite a restrictive stance, LSM growth accelerated from 4.8 per cent (Jul–Dec) to 5.8 per cent (Jul–Feb), while GDP growth reached 3.7 per cent in Q1 FY2026. This suggests that the monetary stance remained sufficiently tight to contain inflationary pressures while allowing output expansion in key sectors, particularly manufacturing.

Economic growth

GDP growth reached 3.7 per cent in Q1 FY2026, reflecting a recovery from the low-growth environment of the previous year. However, the sectoral composition indicates that growth remained uneven, with industry emerging as the primary driver.

The industrial sector expanded by 9.4 per cent, significantly outpacing agriculture (2.9 per cent) and services (2.4 per cent). As shown in Table 2, this divergence suggests that the recovery has been industry-led rather than broad-based.

Within the industry, LSM growth increased from 4.8 per cent (Jul–Dec) to 5.8 per cent (Jul–Feb), indicating sequential strengthening. Disaggregated indicators reinforce this trend: automobile production increased by 56 per cent, while trucks and buses output rose by 89 per cent, pointing to improved transport demand, logistics activity, and capital utilisation.

In contrast, agricultural growth remained moderate, likely reflecting structural constraints, while growth in services suggests a lagged response to improvements in the real economy. Sustaining higher growth will require broader sectoral expansion beyond industry.

Table 2: GDP Growth | Source: SBP

External sector performance

The current account recorded deficits of $737 million in Q1 and $624 million in Q2 FY2026, resulting in a cumulative deficit of $1.36 billion during the first half of the fiscal year. This position reversed in Q3, which posted a surplus of $1.369 billion, bringing the cumulative balance to a marginal surplus of $8 million during Jul–Mar.

The adjustment was largely concentrated in Q3, particularly in March 2026, which recorded a surplus of $1.07 billion. This pattern indicates that the improvement in the external balance occurred toward the latter part of the period rather than as a gradual progression.

Remittance inflows appear to have played a key role in this adjustment, particularly in Q3, while exports remained relatively stable and supportive. On the import side, the shift from deficit to near balance suggests a degree of containment in external outflows.

Overall, the data indicate a shift from deficit to near balance within FY2026, although the sustainability of this adjustment will depend on continued inflows and import management.

Table 3: External Sector | Source: SBP

External financing resilience

Pakistan’s external financing position during FY2026 reflects measured resilience under significant repayment pressures, supported by timely inflows and effective liquidity management. During the period, the country met $1.3 billion in Eurobond maturities while managing additional external obligations of approximately $3.5 billion payable to the UAE.

Despite these outflows, stability was supported by financial inflows, including $2 billion from the Kingdom of Saudi Arabia (April 2026), which helped ease pressure on foreign exchange reserves. As a result, reserves remained around $20.5 billion, indicating that external financing requirements were managed without triggering balance-of-payments stress.

Pakistan’s macroeconomic performance reflects a transition from stabilisation to recovery, supported by coordinated fiscal and monetary policy.

Viewed alongside the current account improvement to an $8 million surplus (Jul–Mar FY2026), these developments suggest that stability was achieved through a combination of inflows, controlled outflows, and improved external account performance. This reflects strengthened external debt management and continued support from bilateral partners.

Fiscal performance

Fiscal performance showed improvement, with a surplus of 0.4 per cent of GDP and a primary surplus of 3.2 per cent. Revenue growth remained around 9–10 per cent, reflecting continued fiscal consolidation.

The primary surplus is particularly significant as it indicates the government’s ability to meet non-interest expenditures through its revenues, aligning with broader stabilisation objectives. Sustaining fiscal discipline will remain important to support macroeconomic stability and manage debt dynamics.

Investment & financial sector

Foreign Direct Investment (FDI) inflows reached approximately $1.2 billion during Jul–Feb FY2026, indicating a gradual recovery in capital inflows. These were primarily concentrated in energy, manufacturing, and infrastructure.

The Pakistan Stock Exchange also recorded strong performance, with the KSE-100 Index crossing 184,000 points — among the highest levels in its history. This reflects improved investor confidence in a stabilising macroeconomic environment.

Banking sector indicators show improved liquidity conditions, supported by lower inflation and stabilised macroeconomic variables. This facilitated a gradual increase in private sector credit, indicating improved borrowing capacity and reduced financial uncertainty.

Global risks

Brent crude oil prices remained elevated within the range of $104.66–$106.11 per barrel (March 2026), driven by geopolitical tensions between the United States and Iran. For Pakistan, higher oil prices increase import payments and exert pressure on the external account.

Inflation declined to the 5–6 per cent range, supported by a positive real interest rate and sustained policy discipline.

While the current account recorded a marginal surplus during Jul–Mar FY2026, sustained high oil prices could widen external imbalances. Continued policy vigilance will therefore be required to manage external risks.

Conclusion

Pakistan’s economy has transitioned toward recovery, as reflected in key macroeconomic indicators during FY2026. Inflation declined to the 5–6 per cent range, GDP growth reached 3.7 per cent in Q1, and the current account shifted from deficits in the first half to a marginal surplus of $8 million during Jul–Mar. Fiscal performance also improved, with a surplus of 0.4 per cent of GDP and a primary surplus of 3.2 per cent, while foreign exchange reserves remained around $20.5 billion despite external repayment pressures.

These indicators collectively point to measurable macroeconomic stabilisation, supported by improvements in price stability, growth momentum, fiscal discipline, and external account management. Sustaining this recovery will depend on broadening growth across sectors, maintaining policy discipline, and managing external vulnerabilities.

Dr Rana Khalid Mehmood

Dr Rana Khalid Mehmood holds a PhD in Economics and is the focal person for overseas Pakistanis at the Prime Minister’s Youth Programme (PMYP).