By Qudsia Bano

Pakistan’s economy expanded 3.8 percent during the first half of FY26 as growth accelerated across industry, agriculture and services, reflecting improving macroeconomic stability and easing financial conditions, according to the State Bank of Pakistan’s Half Year Report 2025-26.

The report showed real GDP growth nearly doubled from 1.9 percent in H1-FY25 to 3.8 percent during the review period. The central bank said the recovery was broad-based, with the strongest contribution coming from industry, followed by services and agriculture.

Industrial growth surged to 8.1 percent during H1-FY26 compared with only 0.5 percent in the same period last year. Large-scale manufacturing rebounded 4.8 percent after contracting during the comparable periods of the previous three years. According to the SBP, the industrial rebound reflected stronger domestic demand, lower borrowing costs, stable exchange rates and easing inflationary pressures.

The automobile sector benefited from lower financing costs, promotional discounts and new model launches, while textiles and petroleum products also supported manufacturing activity. Construction-related sectors gained momentum because of higher development spending and government-backed housing initiatives. Agriculture expanded 2.2 percent during H1-FY26 compared with 1.4 percent a year earlier.

The report said livestock growth offset flood-related damage to important crops such as cotton and maize. Rice and sugarcane production also performed better than initially feared following coordinated recovery efforts in flood-affected areas. The services sector grew 3.1 percent during the review period compared with 2.6 percent in H1-FY25. Wholesale and retail trade, transportation and public administration were among the largest contributors to services growth.

The SBP linked the broader recovery to macroeconomic stabilisation achieved through prudent monetary and fiscal policies. Average inflation declined to 5.2 percent during H1-FY26 from 7.2 percent in the same period last year, while the exchange rate appreciated 1.3 percent. Foreign exchange reserves also improved significantly. The SBP’s liquid reserves increased from $14.5 billion at the end of FY25 to $16.1 billion by December 2025.

The report said easing inflation and improved external-sector stability allowed the central bank to gradually reduce interest rates. The SBP cut the policy rate by 50 basis points in December 2025, taking the cumulative reduction since June 2024 to 1,150 basis points.

Lower interest rates improved financing conditions for businesses and consumers, supporting industrial recovery and domestic demand. Fiscal conditions also improved sharply during H1-FY26. Pakistan posted a fiscal surplus for the first time since FY02 as lower interest payments significantly reduced the government’s debt-servicing burden.

The report noted that fiscal consolidation, stronger SBP profits and increased Petroleum Development Levy collection helped strengthen public finances during the review period. However, the SBP cautioned that the recovery remains vulnerable to external shocks and structural weaknesses. Exports declined 5 percent during H1-FY26 while imports increased 12.4 percent, widening the trade deficit by nearly 36 percent. The report identified weak competitiveness, low productivity, policy inconsistencies and limited integration into global value chains as major constraints limiting long-term growth potential.

The ongoing war in the Middle East has also emerged as a major risk to the outlook. The SBP warned that higher oil prices, supply-chain disruptions and increased freight costs could affect inflation, trade, remittance inflows and industrial production in coming months. Despite these risks, the central bank projected GDP growth within the range of 3.75 percent to 4.75 percent for FY26.

The SBP stressed that Pakistan’s transition toward a sustainable high-growth path depends on addressing chronic structural weaknesses that continue to limit the economy’s long-term potential.

Credit: INP-WealthPk