Pakistan’s inflation is expected to remain elevated at 10 to 11 percent in August 2026 as global commodity and energy price pressures continue to affect the domestic economic environment. At the same time, declining foreign direct investment, a deeper contraction in private-sector credit and increasing climate risks linked to heavy rainfall and floods are creating additional challenges for economic growth, agricultural output, inflation and the external account. The assessment was presented in the Finance Division’s monthly Economic Update and Outlook for August 2026, which highlighted continued risks from geopolitical uncertainty, global energy prices and their possible impact on domestic inflation and external-sector conditions.
The Finance Division said continued prudent macroeconomic management and implementation of reforms will remain important to protect economic stability and maintain growth momentum during fiscal year 2027. The outlook emphasised that policy discipline and structural reforms will be required to support sustainable and inclusive growth while improving the economy’s ability to withstand external shocks. The assessment comes as several indicators show mixed developments across the economy, with improvements in exports, remittances and some industrial sectors being accompanied by weaker investment, private-sector credit and certain manufacturing segments.
Foreign direct investment remained one of the areas of concern during the opening month of FY2027. The Economic Update reported a 21 percent contraction in FDI, with inflows declining from $223.5 million in July 2025 to $178.6 million in July 2026. Private-sector credit also remained under pressure, with credit recording a retirement of Rs393.4 billion in July 2026 compared with Rs232.1 billion during the same month a year earlier. The contraction indicates weaker credit activity at a time when stronger private-sector financing could support business activity, investment and economic expansion.
Broad money also recorded a sharper contraction during the first part of FY2027. From July 1 to August 14, broad money, or M2, declined by Rs2,629.5 billion compared with a contraction of Rs1,362.0 billion during the corresponding period a year earlier. The decline reflected reductions in both the Net Foreign Assets and Net Domestic Assets of the banking system. Net Foreign Assets fell by Rs260.1 billion, while Net Domestic Assets declined by Rs2,369.4 billion, indicating that both components contributed to the overall contraction in broad money during the period.
Agriculture presented a mixed picture as the government continued efforts to support farmers through access to agricultural inputs, credit and machinery. Imports of agricultural machinery and implements increased by 25.9 percent during July FY2027, reaching $18.2 million compared with $14.4 million a year earlier. During Kharif 2026 from April to July, urea offtake reached 2,054 thousand tonnes, representing growth of 10.5 percent compared with Kharif 2025. DAP offtake, however, declined by 29.9 percent to 292 thousand tonnes, with the report attributing the reduction partly to higher prices. Agriculture credit disbursement reached Rs3,231.6 billion during July-June FY2026, increasing 24.7 percent from Rs2,592.2 billion in the previous year. Despite these developments, heavy rainfall and floods remain a potential threat to agricultural output and the achievement of sector growth targets.
Industrial activity showed an overall improvement during FY2026, with Large-Scale Manufacturing growing by 4.98 percent compared with a contraction of 0.7 percent in the previous year. Growth was recorded in 16 of 22 sectors, with automobiles, food, wearing apparel and coke and petroleum products among the sectors contributing to the increase. However, the manufacturing sector faced renewed weakness in June 2026, when LSM declined by 3.5 percent year on year and 6.1 percent month on month. Wearing apparel, textiles and pharmaceuticals were major contributors to the monthly decline, collectively accounting for around 4.6 percentage points and more than three-fourths of the overall reduction.
Pakistan’s external sector remained comparatively resilient during July 2026, supported by stronger exports and improvements in services and primary income balances. Goods and services exports increased to $3.94 billion from $3.48 billion a year earlier, while goods exports rose 9.4 percent to $3.01 billion. Petroleum products, cotton yarn and readymade garments recorded notable export gains. Imports of goods and services, however, also increased to $7.31 billion from $6.46 billion, with goods imports rising 13.4 percent to $6.15 billion. Higher imports of machinery, transport equipment and metals contributed to the increase, although petroleum imports declined by 5.2 percent.
As imports grew faster than exports, the goods and services trade deficit widened to $3.37 billion from $2.98 billion in July 2025. However, improvements in other external-sector components provided some offset. The services deficit narrowed to $228 million from $304 million, while the primary income deficit also declined. Workers’ remittances remained an important source of support, increasing 13 percent year on year to $3.6 billion. Higher secondary income, combined with better services and primary income balances, helped narrow the current account deficit to $328 million in July 2026 from $529 million a year earlier.
Financial inflows also remained positive during July. Total FDI inflows stood at $304 million, while net FDI amounted to $178.6 million after investment outflows were taken into account. Portfolio investment recorded a net inflow of $25.9 million, reversing the outflow reported a year earlier. Foreign exchange reserves remained at a comfortable $22.6 billion as of August 21, 2026, including $17.1 billion held by the State Bank of Pakistan. The reserve position provides some support to the external account despite continuing pressures from the trade deficit and global economic conditions.
Fiscal performance also showed positive developments during July FY2027. Federal Board of Revenue tax collection increased 8.4 percent to Rs820.9 billion. Direct taxes rose by 3 percent, while indirect taxes increased by 11.9 percent. Within indirect taxation, sales tax collection increased 18.3 percent and federal excise duty rose 3.4 percent, while customs duties declined 2.4 percent. Government borrowing for budgetary support recorded a net retirement of Rs413.7 billion compared with Rs76.3 billion during the previous year, while private-sector credit recorded a seasonal retirement of Rs393.4 billion against Rs232.1 billion a year earlier.
The Pakistan Stock Exchange also experienced volatility during July amid renewed geopolitical tensions. The KSE-100 Index declined by 4,208 points to close at 176,094, while market capitalisation fell by Rs442 billion to Rs19,755.7 billion by the end of July. However, data through August 28, 2026 showed a stronger position compared with the same date in the previous year, with the stock market index increasing by 20.6 percent, market capitalisation rising 13.4 percent and incorporation of companies increasing by 33.8 percent.
Economic activity was also supported by developments in employment and social protection. The Bureau of Emigration and Overseas Employment registered 39,159 Pakistani workers for overseas employment during July 2026, reflecting continued access to international labour markets. During the same month, the Pakistan Poverty Alleviation Fund, in partnership with 24 organisations, disbursed 5,778 interest-free loans worth Rs413 million. Cumulative loan disbursements since 2019 have reached Rs126.67 billion. Separately, Rs706 billion was disbursed under the Benazir Income Support Programme during FY2026 to support vulnerable households and strengthen the social safety net.
Looking ahead, the Finance Division expects external-sector conditions to remain broadly supportive, with improved exports, particularly textiles, sustained remittance inflows and continued export facilitation measures providing support to the balance of payments. These factors are expected to help contain external pressures and support foreign exchange reserve adequacy. However, elevated inflation, global energy prices, geopolitical uncertainty, weaker investment and credit conditions, along with climate-related risks, remain important challenges for the economy as Pakistan moves further into FY2027.
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