Pakistan economy shows steady recovery in first half of FY26

Pakistan’s economy completed the first half of fiscal year 2026 with sustained macroeconomic stability, supported by contained inflation, rebounding large-scale manufacturing (LSM) and stronger foreign exchange reserves, the Ministry of Finance said in its latest Monthly Economic Outlook.

“The economy has maintained stability with improving growth prospects,” the ministry said, pointing to fiscal and primary surpluses, robust remittances and a stable exchange rate. It added that LSM “has gained momentum”, signaling stronger growth for the remainder of the fiscal year.

Money supply (M2) grew 3.7% during July-December FY2026, compared with a contraction of 0.7% in the same period last year.

Net foreign assets of the banking system increased by PKR 107.9 billion, while net domestic assets rose by PKR 1.41 trillion, reversing a decline recorded a year earlier.

Government borrowing for budgetary support showed net retirement of PKR 347 billion during the period, compared with PKR 2.22 trillion last year. Private sector credit reached PKR 992.3 billion, lower than last year’s level, though demand for fixed investment loans rose to PKR 257 billion, which the ministry said “bodes well for sustaining LSM growth in coming months”.

The Pakistan Stock Exchange extended its rally, reflecting improved investor sentiment. The benchmark KSE-100 index gained 7,376 points in December to close at 174,054, while market capitalization increased by PKR 823 billion to PKR 19.69 trillion. As of Jan. 26, the index stood at 188,587 points, with total market capitalization at PKR 21.16 trillion.

Employment abroad and interest-free lending remained key sources of income support, the outlook said. In December, 76,207 workers were registered for overseas employment, up 18.7% from a year earlier. For calendar year 2025, registrations rose 5.1% to 762,499 workers.

The Pakistan Poverty Alleviation Fund disbursed 21,050 interest-free loans worth PKR 1.36 billion in December, bringing total disbursements since 2019 to PKR 122.8 billion. Spending under the Benazir Income Support Program totaled PKR 144.9 billion during July-November FY2026.

On the external front, the ministry said the current account is projected to remain in deficit, but “robust remittance inflows and steady performance in IT and services exports are likely to cushion external pressures”.

Fiscal performance improved during July-November FY2026, with the government posting a consolidated fiscal surplus of 0.8% of GDP, compared with a 0.04% deficit a year earlier. A primary surplus of 2.8% of GDP was recorded, broadly in line with last year’s level.

Gross federal revenues grew 7.8%, driven by a 10.2% increase in Federal Board of Revenue taxes and a 4.8% rise in non-tax revenue. Total expenditure declined 6.2%, reflecting a 21.3% drop in mark-up payments, while development spending increased 1.5%.

During July-December FY2026, FBR tax revenue rose 9.5% to PKR 6.16 trillion, led by growth in direct taxes, sales tax, federal excise duty and customs duty.

Building on these gains, the government has launched economic governance reforms aimed at strengthening institutions and enabling sustainable, private sector-led growth, the ministry said.