As Pakistan gears up for the fiscal year 2025-26, it faces a multifaceted economic environment—characterized by rising inflationary pressures, modest gains in manufacturing, and a renewed emphasis on fiscal discipline.
Although April brought volatility to the financial markets—largely due to escalating geopolitical tensions that dragged down the KSE-100 index—the subsequent rebound and strengthening economic signals point to a degree of underlying resilience. An improved outlook from Fitch Ratings, backed by a current account surplus, easing inflation trends, and solid revenue gains, suggests that the country is actively pursuing stabilization while paving the way for sustainable growth. Environmental financing initiatives further reinforce this strategic pivot.
The government anticipates inflationary pressures to intensify in the coming fiscal cycle, projecting an average CPI-based inflation rate of 7.5%, a notable rise from 5% recorded during the outgoing fiscal year. The Ministry of Planning has warned that lifting import restrictions and meeting significant external debt obligations may put further strain on the current account, potentially widening the deficit. Nonetheless, economic growth is expected to improve, with GDP projected to climb to 4.2%—up from this year’s 2.68%—signaling a slow but steady recovery under continued oversight from the IMF.
Public investment is expected to rise from 2.9% to 3.2% of GDP, while private investment is forecast to edge up from 9.1% to 9.8%. Policymakers will continue to walk a tightrope, balancing monetary and fiscal levers to preserve macroeconomic stability. The expected increase in inflation stems from the fading low base effect, compounded by global trade uncertainties and adjustments in domestic utility tariffs. While risks persist in the external sector due to more relaxed import controls and large debt servicing commitments, the government remains hopeful that strong remittances, improving exports, and projected foreign inflows will cushion the impact and support external equilibrium.
The diminished base effect, which helped suppress inflation in the previous cycle, is expected to wear off during the upcoming fiscal year, pushing average CPI-based inflation to 7.5%. Though the government expects inflation to remain in single digits overall, it acknowledges that monthly rates may occasionally breach the double-digit mark. Official projections foresee a gradual increase in inflation toward 3-4% by June 2025, after hitting record lows earlier in the year. The Monthly Economic Outlook forecasts a brief window of low inflation—between 1.5% and 2%—before an anticipated uptick as the year closes. Notably, headline inflation plummeted to 0.3% year-on-year in April 2025, down from 0.7% in March and a staggering 17.3% in April 2024.
In light of these subdued inflationary trends, the State Bank’s Monetary Policy Committee (MPC) lowered the policy rate by 100 basis points to 11% on May 5, 2025. This dovish shift coincided with a sharp rise in net foreign assets, which surged to Rs1,210.5 billion from Rs590 billion. Meanwhile, net domestic assets grew more moderately, reaching Rs476.2 billion—significantly lower than the Rs1,588.3 billion added in the previous fiscal year. Credit to the private sector saw a robust expansion as well, totaling Rs751.5 billion, more than triple the Rs239.9 billion reported during the same period last year.
The KSE-100 index, after falling by 6,480 points to close April at 111,327 due to geopolitical frictions with India, has since begun to recover. Market capitalization fell by Rs853 billion during the month, ending at Rs13,521 billion. Despite these setbacks, the broader economic picture offers cautious optimism.
Large-scale manufacturing (LSM) remains under pressure, with a year-on-year contraction and a marginal monthly decline pointing to a sluggish turnaround. However, certain segments show promise—such as increased automobile production, higher raw material imports, and a more accommodating monetary environment. Favorable weather conditions and improved water supplies are also projected to boost agricultural output, offering a welcome tailwind to economic expansion.
The Finance Ministry reported that Fitch’s recent rating upgrade reflects better fiscal management, a narrowing current account deficit, and waning inflation. Revenues have outpaced spending, narrowing the fiscal deficit and enhancing the primary surplus. A current account surplus of $1.9 billion, buoyed by healthy export performance and resilient remittance inflows, further strengthened the macroeconomic outlook. The combination of historically low inflation and a more relaxed monetary policy has provided fertile ground for renewed economic activity. While LSM performance remains uneven, sectors such as automotive and export-oriented manufacturing are making meaningful progress.
In a bid to reinforce long-term economic sustainability, Pakistan is also embracing green financing. The IMF’s Resilient and Sustainable Facility and the launch of Pakistan’s first Green Sukuk highlight the country’s strategic pivot toward climate-aligned economic development.
From July to March of FY2025, total revenue grew an impressive 36.7%, reaching Rs13.37 trillion, up from Rs9.78 trillion the previous year. This surge was primarily driven by a 68% increase in non-tax revenue, totaling Rs4.23 trillion, thanks to central bank profits, petroleum levies, dividends, and energy surcharges. The Federal Board of Revenue (FBR) reported collecting Rs9.3 trillion in taxes during July–April, a 26.3% year-on-year rise. Total government expenditures climbed to Rs16.34 trillion—an increase of 19.4%—with current spending rising by 18.3% and development expenditures jumping 32.6%. As a result, the fiscal deficit dropped from 3.7% to 2.6% of GDP, while the primary surplus expanded from 1.5% to 3% of GDP, reaching Rs3.47 trillion.
The Ministry of Finance emphasized that these fiscal outcomes underscore the government’s improved budgetary discipline and reflect the ongoing efforts to anchor macroeconomic stability.
As Pakistan looks ahead to FY2025-26, the economic outlook reflects a delicate but deliberate balancing act—recovering from past shocks while striving for structural resilience. Encouraging signs such as stronger revenues, improved external balances, and renewed climate-focused investments suggest a more grounded path forward. Even as inflation and industrial slowdowns present challenges, the foundation laid through prudent governance and international support places the country in a stronger position to consolidate macroeconomic gains in the year ahead.