Pakistan’s economic activity is expected to strengthen during FY2026-27 as signs of recovery broaden across agriculture, manufacturing and private-sector credit, according to the Finance Division’s Monthly Economic Update & Outlook for September 2026. The report indicates that improving domestic activity and stronger external indicators are supporting the economic outlook, although elevated inflation remains a concern and the future direction of prices continues to depend significantly on international oil prices.
The Finance Division expects remittances and services exports to continue supporting household incomes and Pakistan’s external accounts during the fiscal year. Improved foreign exchange reserves and renewed access to international capital markets are also expected to provide greater protection against external pressures. At the same time, higher global oil prices remain a major risk because they can raise domestic energy and transportation costs, reduce household purchasing power and increase the country’s import bill.
Inflation accelerated to 11.1% year-on-year in August 2026 from 9.2% in July and 3.1% in August 2025. On a monthly basis, inflation increased 1.2%, the same rate recorded in July. Food, housing and utilities, and transport were responsible for 8.2 percentage points of headline inflation, accounting for roughly three-quarters of the overall increase. Food alone contributed 4.9 percentage points. Core inflation remained lower, standing at 8.8% in urban areas and 8.5% in rural areas, while the Sensitive Price Indicator increased 0.99% during the week ending September 24.
The Finance Division expects inflation to remain elevated, projecting headline inflation of 10% to 11% for September. The report identifies global oil prices as a key factor that could influence the inflation path in the coming months. Higher crude prices can affect transportation, electricity, food distribution and production costs, creating pressure across different segments of the economy. The government has therefore identified targeted and temporary relief measures, along with progress on energy and tax reforms, as important areas for economic management.
Manufacturing activity showed improvement during the opening months of FY27. Large-scale manufacturing output increased 3.03% year-on-year in July 2026 and was 9.5% higher compared with June. Automobile production recorded a 57% increase, while wearing apparel output rose 22% and tobacco production increased 35.8%. Growth was also recorded in several other manufacturing segments, indicating broader activity across industrial sectors rather than relying on a single area of production.
The automobile sector also recorded higher activity during July and August, with vehicle production increasing 27.6% and sales rising 29.9%. Cement activity provided another indication of domestic demand, as total cement dispatches increased 2.8% to approximately 8.5 million tonnes. Domestic dispatches increased 8%, more than offsetting a 16.7% decline in exports. The figures indicate that domestic construction-related demand remained an important contributor to cement activity during the period.
Agricultural indicators also remained positive at the start of FY27. Agricultural credit disbursements increased 16.4% to Rs271.9 billion in July from Rs233.7 billion during the same month a year earlier. Urea offtake between April and August reached 2.755 million tonnes, representing a 2.9% increase from the corresponding Kharif period last year. DAP offtake, however, declined 24.5% to 417,000 tonnes. Tractor sales increased 4.7% to 2,294 units during July-August, while imports of agricultural machinery and implements amounted to $29.2 million. Higher acreage under rice and sugarcane, together with encouraging early cotton arrivals, also pointed towards improved crop activity.
Pakistan’s external position strengthened during the first two months of FY27 despite a wider trade gap. The current account deficit narrowed to $543 million from $853 million a year earlier. Goods imports increased 11.4%, while exports rose 4%. Workers’ remittances increased 14.7% to $7.29 billion, exceeding the combined goods and services deficit of $6.75 billion. Services exports also recorded strong growth of 28.8%, reaching $1.81 billion during the period.
Foreign investment indicators also improved, with combined foreign direct investment and portfolio inflows increasing 80.2% to $562 million. Foreign direct investment increased 24% to $494.5 million, while portfolio investment returned to a net inflow. The issuance of a $3 billion Eurobond in September further supported Pakistan’s reserve position. State Bank of Pakistan liquid foreign exchange reserves reached $21.39 billion on September 18, equivalent to around three months of goods and services imports, while total liquid reserves stood at $26.8 billion.
Fiscal indicators presented a mixed picture during the opening period of the fiscal year. Federal Board of Revenue net tax collection increased 3.7% to Rs1.722 trillion during July-August from Rs1.662 trillion in the same period last year. Sales tax collection increased 13.8% to Rs718.9 billion, while federal excise duty receipts rose 2.2% to Rs117.9 billion. Direct tax collection declined 2.9% to Rs689.6 billion and customs receipts fell 4% to Rs195.9 billion.
Federal current expenditure increased to Rs1.092 trillion in July 2026 from Rs761.6 billion a year earlier. Interest payments accounted for a significant portion of the increase, rising to Rs792.9 billion from Rs490.4 billion. Non-interest current expenditure reached Rs299.1 billion, representing a 10.3% increase. As a result, the consolidated fiscal deficit widened to Rs596.6 billion, equivalent to 0.4% of GDP, compared with Rs261.5 billion, or 0.2% of GDP, a year earlier. Despite the wider deficit, the primary balance remained in surplus at Rs196.3 billion, or 0.1% of GDP, compared with Rs228.9 billion, or 0.2% of GDP, in the previous year.
Monetary conditions also remained focused on managing inflation while supporting economic activity. The State Bank of Pakistan maintained its policy rate at 11.5% on September 14, with global crude oil prices identified as the main risk to the inflation outlook. The central bank’s medium-term inflation target remains between 5% and 7%. For the coming period, the Finance Division has highlighted revenue mobilisation, temporary and targeted relief measures, and continued energy and tax reforms as key priorities. The combination of stronger agricultural and industrial activity, improving external indicators and continued fiscal and monetary management will shape the pace of Pakistan’s economic recovery during FY27.
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