Pakistan economy enters the acceleration phase

January 27, 2026 (MLN): Pakistan’s economy is showing clear signs of revival as FY2026 unfolds, with momentum building across key sectors amid improving macroeconomic conditions.

High-frequency indicators point to strengthening domestic activity, particularly in large-scale manufacturing and agriculture, while moderating inflation has created room for more supportive monetary conditions. Improved fiscal discipline and steady inflows from overseas Pakistanis are also helping to stabilize the macroeconomic landscape, even as external pressures persist.

According to the Government of Pakistan’s Monthly Economic Outlook 2026, the economy remains well positioned to sustain its growth trajectory in FY2026, supported by prudent policy measures, ongoing structural reforms, and encouraging sectoral performance.

Agriculture recorded a notable turnaround in the first quarter of FY2026, posting growth of 2.9% compared to just 1.0% in the same period last year.

 While important crops excluding wheat still contracted by 0.7%, the decline was far smaller than the sharp 13.1% contraction seen a year earlier, largely reflecting subdued cotton output.

Other crops also remained under pressure but showed improvement, as their contraction narrowed to 6.4% from 19.3% last year, despite higher fertilizer prices and lower green fodder availability.

Livestock emerged as a standout performer, expanding by a robust 6.3%, up from 2% last year, supported by lower input costs.

 Forestry and fishing maintained their usual growth patterns, rising by 2.1% and 0.9%, respectively. On the input side, confidence among farmers appeared to strengthen, with agricultural credit disbursement rising by over 11% to Rs1.41 trillion during July–December FY2026, alongside a more than 21% increase in imports of agricultural machinery.

Industrial activity provided an even stronger boost. Large-Scale Manufacturing (LSM) grew by 6% during July–November FY2026, with the Quantum Index of Manufacturing reaching its highest level for this period since FY2016. Sixteen industrial sectors posted positive growth, led by textiles, food and beverages, automobiles, petroleum products, and electrical equipment.

In November alone, LSM surged by 10.4% year-on-year, driven primarily by automobiles, petroleum products, and wearing apparel.

The automobile sector remained a key growth engine, with car production jumping by over 56% during July–December, while output of trucks and buses nearly doubled.

Cement dispatches also rose close to 10%, supported by strong domestic demand, although exports declined slightly.

Inflation continued its downward trend, easing to 5.6% year-on-year in December 2025 from 6.1% a month earlier. Average inflation during the first half of FY2026 stood at 5.2%, well below 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 notable relief. The Sensitive Price Indicator also recorded a weekly decline in late January, suggesting short-term price stability.

On the external front, the current account shifted into a deficit of $1.2 billion during July–December FY2026, compared to a surplus last year, reflecting higher import demand. While total exports remained broadly stable, IT and IT-enabled services stood out, growing nearly 20%. Imports rose sharply, particularly petroleum products and palm oil, widening the trade gap.

However, remittances climbed by over 10% to $19.7 billion, helping to cushion external pressures. Foreign exchange reserves stood at $21.3 billion by mid-January, with the central 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 was lower than last year, demand for fixed investment loans increased, signaling confidence in future industrial expansion.

Investor sentiment mirrored these gains. The Pakistan Stock Exchange staged a strong rally in December, with the KSE-100 Index adding more than 7,300 points.

By late January, the benchmark index had climbed further to around 188,500 points, pushing market capitalization above Rs21 trillion.

Overall, the latest indicators point to a gradual but meaningful strengthening of Pakistan’s economic foundations.

While external imbalances and global uncertainties continue to pose risks, the combination of moderating inflation, expanding industrial output, improving investment sentiment, and steady remittance inflows suggests that the economy is on a more stable and sustainable path in FY2026.

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