Qudsia Bano

Pakistan’s economic momentum remained firm in the opening months of FY26, with high-frequency indicators pointing to broad-based strength across key sectors and reinforcing expectations of steady growth during the year. Data reviewed by the Monetary Policy Committee (MPC) showed that industrial activity continued to perform strongly. Large-scale manufacturing (LSM) recorded year-on-year growth of 4.1 percent in the first quarter of FY26, with most industrial sectors posting higher output.

The pickup reflects improving domestic demand and a gradual recovery in production cycles following earlier stabilization measures. Supporting indicators also painted a positive picture for industry. Higher sales of automobiles, fertilizer, and cement, along with increased imports of machinery and intermediate goods, suggested sustained momentum in industrial activity in the coming months.

However, policymakers cautioned that a challenging global export environment could pose risks to this outlook, particularly for export-oriented industries. The agriculture sector also showed encouraging signs. Incoming information on major crops, particularly wheat, supported earlier assessments of improved performance. Data on area under cultivation, favorable input conditions, and government-backed incentive schemes indicated that wheat production might exceed the official target for the season.

Stronger performance in agriculture and industry is expected to generate positive spillovers for the services sector, which typically benefits from higher activity in commodity-producing segments. On the back of these developments, real GDP growth for FY26 is now expected to remain in the upper half of the previously projected range of 3.25 to 4.25 percent, reflecting rising confidence in the domestic recovery.

On the external front, the current account recorded a cumulative deficit of $0.7 billion during July–October FY26, broadly in line with earlier expectations. Imports continued to rise alongside improving economic activity, while workers’ remittances remained resilient. Exports, however, came under pressure, mainly due to a sharp decline in food exports, particularly rice. Although financing inflows remained modest during the period, Pakistan’s foreign exchange position improved.

The State Bank of Pakistan’s foreign exchange reserves crossed the December 2025 target of $15.5 billion, driven largely by continued foreign exchange purchases by the central bank. Looking ahead, global headwinds—especially evolving trade dynamics—are expected to weigh on export performance, while lower global oil prices could help contain import growth.

Overall, the assessment for the current account remains broadly unchanged, with the deficit projected to stay within 0 to 1 percent of GDP in FY26. With the realization of planned official inflows, the central bank expects foreign exchange reserves to strengthen further, reaching $17.8 billion by June 2026, providing additional buffers against external shocks and supporting macroeconomic stability.

Credit: INP-WealthPk