Pakistan Eyes Steady Economic Recovery in FY26 as Inflation Cools and External Sector Strengthens

Pakistan Eyes Steady Economic Recovery in FY26 as Inflation Cools and External Sector Strengthens

Pakistan Eyes Steady Economic Recovery in FY26 as Inflation Cools and External Sector Strengthens.In a promising start to fiscal year 2026, the Ministry of Finance (MoF) has released its Monthly Economic Update & Outlook, projecting inflation for July 2025 to remain within 3.5% to 4.5%, signaling a continuation of Pakistan’s economic recovery. While the ministry acknowledges risks from recent heavy rains affecting agriculture and logistics, it remains confident in the country’s economic fundamentals.

Backed by fiscal discipline, stable exchange rates, and improved macroeconomic indicators, Pakistan appears to be entering FY26 with renewed optimism and direction. A strong rebound in remittances, exports, and industrial output further strengthens this trajectory.

July Inflation to Stay in Check Despite Weather Risks

Ministry Forecasts 3.5–4.5% Inflation for July

The MoF estimates consumer inflation for July to fall between 3.5% and 4.5%, reinforcing a trend of easing price pressure. This is a marked improvement compared to previous years and offers breathing room for businesses and households alike.

Heavy Rains May Threaten Agricultural Supply Chains

However, the ministry also issued a cautionary note: monsoon rains and floods could disrupt crop production and logistics, which may affect future price trends. Since June 26, flood-related incidents have claimed 266 lives, with over 630 injured and more than 1,500 homes destroyed, highlighting the potential economic impact of climate events.

Recent Inflation Drop Attributed to Strong Economic Policies

Interest Rate Cuts and Stable Currency Support Price Stability

The recent downturn in inflation reflects the effect of monetary easing, including lower policy rates and improved availability of credit. A stable exchange rate has also helped reduce the cost of imported goods, curbing overall inflation.

Prudent Macroeconomic Management Pays Off

Disciplined fiscal policy and reforms in taxation and spending have helped maintain stability, allowing the government to respond to market needs without creating inflationary pressures.

Growth Trajectory Strengthens with Start of FY26

Large-Scale Manufacturing Continues Momentum

One of the bright spots for Pakistan’s economy remains Large-Scale Manufacturing (LSM), which continued to grow in June. Increased private sector lending and rising production levels have helped the sector expand further, contributing to GDP and job creation.

Private Sector Credit and Output Driving Recovery

The surge in credit offtake reflects business optimism and an appetite for investment. These trends support higher production of goods and services, especially in value-added sectors such as textiles, pharmaceuticals, and engineering.

External Trade and Currency Show Signs of Stability

Imports of Inputs Expected to Rise

With industry scaling up, imports of raw materials and intermediate goods are on the rise, a sign of a reviving industrial base preparing for greater output in the coming months.

Exports and Remittances Boost Trade Balance

At the same time, exports of value-added products are growing, and workers’ remittances continue to rise. These inflows are reinforcing the external sector, easing pressure on the rupee and supporting foreign reserves.

Major Milestone: First Current Account Surplus in 14 Years

FY25 Surplus Hits $2.11 Billion

For the first time in 14 years, Pakistan recorded a full-year current account surplus, totaling $2.11 billion in FY2025. This historic turnaround contrasts with the $2.07 billion deficit in FY24.

Driven by Remittances and Strong Export Growth

The surplus was largely fueled by an uptick in overseas remittances and export earnings, which offset rising imports. The MoF attributes this to sound external sector management and strategic fiscal planning.

Pakistan’s GDP Expands by 2.68% in FY25

Fiscal Reforms and Resource Management Build Investor Confidence

The economy grew 2.68% in FY2025, as per the Ministry’s report, backed by tightened fiscal control and improved resource allocation. These factors boosted market confidence and paved the way for a monetary policy shift aimed at spurring growth.

Budget Deficit Shrinks, Opening Room for Monetary Easing

Effective fiscal consolidation helped reduce the budget deficit, giving the government more room to ease interest rates and support the private sector without fueling inflation.

Policy Priorities Set for Inclusive and Sustainable Growth

Focus on Revenue, Industry, and Human Development

As FY26 begins, the government is focusing on:

• Enhancing tax collection

• Modernizing agriculture and industry

• Reforming the business climate

• Investing in human capital and education

These areas are seen as essential for building resilience and inclusive growth in the long run.

Continued Reforms to Support Long-Term ResiliencBy targeting both economic and social development, the government hopes to maintain recovery momentum while ensuring wider benefits across society.

Foreign Reserves Near $20 Billion Mark

State Bank Holdings Reflect Improved Economic Buffer

As of July 11, foreign exchange reserves stood at $19.9 billion, including $14.5 billion held by the State Bank of Pakistan (SBP). These reserves serve as a key economic cushion, protecting against future shocks.

Strong External Position to Support FY26 Goals

With rising reserves, stable exchange rates, and a surplus in the current account, Pakistan enters FY26 on stronger footing, better prepared to navigate global and domestic uncertainties.