State of the economy

The September Update and Outlook from the Finance Division reveals a mixed economic picture for Pakistan. The country achieved a decline in the current account deficit, dropping from -853 million dollars in July-August 2026 to -543 million dollars in the first two months of the current year. This success is attributed to rising remittance inflows and slower growth in debt.

However, the rise in trade deficit from 5.16 billion dollars to 6.16 billion dollars is a concern, driven by increased petroleum and product imports due to the Middle East conflict.

While remittances have increased as emigrants, unlike citizens of other countries, choose not to return, debt growth has slowed to 7.7 percent this year from 13 percent the previous fiscal year. Independent economists argue that fiscal consolidation and primary surplus claims are misleading, citing increased tax collections despite lower revenue from sales and withholding taxes due to the conflict. This tax increase, primarily impacting the poor, has contributed to higher food inflation.

The government's primary surplus has been controlled, but this metric excludes interest payments on the national debt, which constituted 46 percent of total current expenditure and 43 percent of the budget. The government recently issued a 3 billion-dollar dual tranche sovereign Eurobond on the London Stock Exchange, but this is not included in the budget estimate as it was issued post-budget.

Manufacturing growth surged to 8.93 percent in July 2025, while the July 2026 growth rate dropped to 3.03 percent, possibly due to rising utility costs and reduced private sector credit.

The report recommends accelerating revenue mobilization, maintaining temporary and targeted relief measures, and focusing on energy and tax reforms to ensure stability and private sector-led growth. However, it argues for a more direct approach to taxation and reduced inefficiencies in tariffs.