Economic Recovery Gains Momentum

Pakistan's economy has demonstrated remarkable resilience in the fiscal year 2025-26, achieving a 3.70% GDP growth rate - the strongest performance in four years - according to the Pakistan Economic Survey 2025-26 released in June 2026. This represents a significant improvement from the 3.18% growth recorded in the previous fiscal year, signaling that the country's economic stabilization efforts are beginning to bear fruit.

Sector-Wise Performance

The economic recovery has been broad-based, with all three major sectors contributing to growth. The agriculture sector grew by 2.89%, driven primarily by livestock performance at 3.75% growth and supported by positive contributions from major crops including wheat (4.3% increase), sugarcane (6.2% increase), and rice (2.8% increase). Despite challenges from monsoon floods in 2025, the sector maintained its crucial role in the economy, contributing 23.44% to GDP.

The industrial sector posted impressive growth of 3.51%, with manufacturing leading the charge at 6.6% - a dramatic improvement from just 2.0% in the previous year. Large-scale manufacturing (LSM) grew by 6.1%, with 16 out of 22 sectors recording positive growth. Notable performers included food production (10.9% growth), wearing apparel (9.8%), and pharmaceuticals. The mining and quarrying sector also returned to growth after four consecutive years of contraction, expanding by 0.4%.

The services sector, Pakistan's largest economic contributor, expanded by 4.09%, maintaining its position as the primary driver of overall GDP growth. This robust performance across sectors demonstrates the economy's diversification and resilience.

Fiscal Consolidation Achievements

One of the most significant achievements of FY2026 has been the dramatic improvement in fiscal management. During July-March FY2026, the fiscal deficit narrowed to just 0.7% of GDP (Rs. 856.4 billion), compared to 2.6% of GDP in the same period last year. This represents one of the strongest fiscal performances in Pakistan's recent history.

The government achieved a historic primary surplus of 3.2% of GDP (Rs. 4,091.5 billion), up from 3.0% in the corresponding period of FY2025. This was accomplished through improved revenue mobilization - with total revenues increasing by 10.7% to Rs. 14,799.3 billion - and prudent expenditure management, with total expenditure declining by 4.2% to Rs. 15,655.6 billion.

Tax revenues grew by 11.3% to Rs. 10,166.6 billion, while non-tax revenues increased by 9.5% to Rs. 4,632.7 billion. The Federal Board of Revenue (FBR) collection rose by 10.1% to Rs. 9,305.9 billion, demonstrating improved tax administration and compliance.

External Sector Strengthening

Pakistan's external sector has shown remarkable improvement, with foreign exchange reserves rising to $22.6 billion by mid-May 2026, with the State Bank of Pakistan holding $17.1 billion and commercial banks $5.5 billion. This represents a significant strengthening of external buffers and provides greater confidence in the country's ability to meet its external obligations.

Workers' remittances remained robust, reaching $30.3 billion with sustained growth of 8.2%. This steady flow of foreign exchange has been crucial in supporting the current account and building reserves. The current account posted a surplus of $72 million during July-March FY2026, though this was lower than the $1.7 billion surplus in the same period last year.

The exchange rate remained broadly stable at an average of Rs. 281.1 per US dollar during July-March FY2026, contributing to external sector confidence and helping to anchor inflation expectations.

Capital Market Performance

Pakistan's stock market demonstrated strong performance, with the KSE-100 index recording significant growth of 18.4%, climbing from 125,627 to 148,743 points. Market capitalization increased by 8.5% (approximately Rs. 1,297.5 billion) to reach Rs. 16,534 billion by March 31, 2026, reflecting improving investor confidence in Pakistan's economic direction.

The Pakistan Mercantile Exchange (PMEX) saw trading activity surge, with over 11.8 million lots traded compared to 5.8 million lots in the corresponding period of FY2025 - representing a 103% increase in trading volume. The total traded value stood at Rs. 9,238 billion, up 41% from Rs. 6,538 billion last year.

Challenges and Concerns

Despite the positive momentum, significant challenges remain. Inflation re-emerged as a concern, with CPI inflation reaching 10.89% in April 2026 compared to just 0.28% in April 2025. This sharp rise was primarily driven by higher international crude oil prices resulting from the Middle East conflict, which led to increased domestic petroleum prices.

Exports declined by 16.8% during the first ten months of FY2026, reflecting both weak global demand and long-standing competitiveness issues. The trade deficit widened to $27.9 billion from $22.7 billion last year, driven by a 6.9% rise in imports as domestic economic activity picked up.

Foreign Direct Investment (FDI) declined by 26% to $1.4 billion, suggesting that while investors are comfortable with short-term financial opportunities in Pakistan's stock market, they remain cautious about committing capital to long-term productive assets. The investment-to-GDP ratio, while improved to 14.4%, remains well below the level needed to sustain the 6-7% growth required to generate sufficient employment opportunities.

Unemployment increased from 6.3% to 7.1%, leaving approximately 1.4 million additional people without jobs - a concerning trend that highlights the need for faster, more job-intensive growth.

Structural Reforms Underway

The government continued to implement a broad and difficult structural reform agenda under the IMF-supported program. Key reforms advanced during the year include:

• Tax Administration: Digitalization of economy, expanded digital invoicing, and improved enforcement systems
• Energy Sector: Operationalization of competitive multi-buyer electricity market, tariff rationalization, and restructuring of loss-making entities
• State-Owned Enterprises: Progress on priority privatization transactions and SOE reforms
• Pension Reform: Shift toward contributory pension systems
• Digital Financial Inclusion: Expansion of digital payments, fintech innovation, and financial access initiatives

Expert Analysis and Outlook

According to KPMG's Economic Brief for June 2026, "Pakistan's economic performance in FY26 can be summed up in two words: stabilization without transformation." The analysis notes that while the economy showed clear signs of recovery, the underlying economic structure remains fragile.

The Asian Development Bank (ADB) projects Pakistan's GDP growth at 3.5% in FY2026 and 4.5% in FY2027, with inflation expected to rise to 6.4% in FY2026 and 6.5% in FY2027 due to surging oil prices and disrupted trade routes from the Middle East conflict.

Finance Minister Senator Muhammad Aurangzeb, in his foreword to the Economic Survey, stated: "Pakistan entered FY2025-26 with restored macroeconomic stability, and during the year the Government consolidated recovery, strengthened confidence, and advanced the transition toward sustainable, inclusive and private-sector-led growth in a demanding environment."

The Path Forward

As Pakistan looks ahead, the government has outlined a 4% GDP growth target for FY2026-27, according to working papers shared by the Ministry of Planning. However, achieving this target will require navigating significant challenges, including the ongoing Middle East conflict's impact on energy prices, global economic uncertainty, and the need to maintain fiscal discipline while supporting growth.

The government plans to present the Federal Budget 2026-27 with a total outlay of approximately Rs. 17.573 trillion, with the Federal Board of Revenue assigned a target of around Rs. 15.264 trillion - requiring strong growth in tax collection.

Key priorities for the coming year include:

• Sustaining macroeconomic stability while accelerating growth
• Improving export competitiveness and addressing the trade deficit
• Attracting foreign direct investment into productive sectors
• Creating employment opportunities and reducing unemployment
• Continuing structural reforms to enhance productivity and competitiveness
• Protecting vulnerable populations while maintaining fiscal discipline
• Investing in human capital development and climate resilience