Pakistan’s economy is exhibiting visible signs of revival as fiscal year 2026 progresses, with momentum building across major sectors amid an improving macroeconomic environment. Recent data points to strengthening domestic activity, supported by rising industrial output, a recovery in agriculture, easing inflationary pressures, and improving investor confidence. While external challenges persist, the overall outlook suggests that economic stability is gradually being restored.
According to the Government of Pakistan’s Monthly Economic Outlook 2026, the economy remains well positioned to sustain its growth trajectory during FY2026. Prudent monetary and fiscal policies, ongoing structural reforms, and encouraging sectoral performance have collectively supported this recovery phase. High-frequency indicators continue to signal stronger domestic demand, particularly within large-scale manufacturing and agriculture, while improved fiscal discipline and steady overseas remittance inflows have helped stabilize the broader macroeconomic landscape.
Agriculture posted a notable turnaround in the first quarter of FY2026, recording growth of 2.9 percent compared to just 1.0 percent in the same period last year. Although important crops excluding wheat still contracted by 0.7 percent, the decline was significantly narrower than the sharp 13.1 percent contraction seen a year earlier, largely reflecting reduced losses in cotton output. Other crops also showed improvement, with contraction easing to 6.4 percent from 19.3 percent last year, despite challenges such as higher fertilizer prices and lower availability of green fodder.
Livestock emerged as a key contributor to agricultural growth, expanding by a robust 6.3 percent, up from 2 percent in the previous year. Lower input costs supported this performance, helping offset weaknesses in other sub-sectors. Forestry and fishing maintained their usual growth trends, rising by 2.1 percent and 0.9 percent, respectively. On the input side, farmer confidence strengthened, as reflected in agricultural credit disbursement, which increased by over 11 percent to Rs1.41 trillion during July–December FY2026. Imports of agricultural machinery also rose by more than 21 percent, indicating higher investment in farm productivity.
Industrial activity provided an even stronger boost to economic momentum. Large-Scale Manufacturing grew by 6 percent during July–November FY2026, with the Quantum Index of Manufacturing reaching its highest level for this period since FY2016. Sixteen industrial sectors recorded positive growth, led by textiles, food and beverages, automobiles, petroleum products, and electrical equipment. In November alone, LSM surged by 10.4 percent year-on-year, driven primarily by automobiles, petroleum products, and wearing apparel.
The automobile sector remained a standout performer, with car production jumping by over 56 percent during July–December, while the production of trucks and buses nearly doubled. Cement dispatches also increased by close to 10 percent on the back of strong domestic demand, although exports saw a slight decline.
Inflation continued its downward trajectory, easing to 5.6 percent year-on-year in December 2025 from 6.1 percent a month earlier. Average inflation during the first half of FY2026 stood at 5.2 percent, significantly lower than last year’s levels. Price pressures remained concentrated in education, health, housing utilities, and non-perishable food items, while sharp declines in perishable food prices provided relief. The Sensitive Price Indicator also recorded a weekly decline in late January, pointing to near-term price stability.
On the external front, the current account recorded a deficit of $1.2 billion during July–December FY2026, compared to a surplus in the same period last year, largely due to higher import demand. While overall exports remained broadly stable, IT and IT-enabled services stood out with nearly 20 percent growth. Imports increased sharply, particularly petroleum products and palm oil, widening the trade gap. However, workers’ remittances rose by over 10 percent to $19.7 billion, helping cushion external pressures. Foreign exchange reserves stood at $21.3 billion by mid-January, with the State Bank holding $16.1 billion.
Financial conditions also showed improvement. Money supply expanded during the first half of the fiscal year, driven by higher domestic credit, while government borrowing for budgetary support declined. Although private sector borrowing remained lower than last year, increased demand for fixed investment loans signaled growing confidence in future industrial expansion.
Investor sentiment mirrored these positive developments. The Pakistan Stock Exchange staged a strong rally in December, with the KSE-100 Index gaining more than 7,300 points. By late January, the benchmark index had climbed further to around 188,500 points, pushing market capitalization beyond Rs21 trillion.
Overall, the latest indicators point to a gradual but meaningful strengthening of Pakistan’s economic foundations. While external imbalances and global uncertainties remain risks, the combination of moderating inflation, expanding industrial output, improving investment sentiment, and steady remittance inflows suggests that the economy is moving toward a more stable and sustainable growth path in FY2026.
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