The Finance Division’s September Update and Outlook presents a mixed picture of Pakistan’s economy, with some indicators showing improvement while others point to persistent structural weaknesses. The document attributes much of the progress to the implementation of commitments under the ongoing International Monetary Fund (IMF) Extended Fund Facility, while identifying the continuing Middle East conflict and elevated global oil prices as major risks to the economic outlook.
The Finance Division has specifically warned that higher international oil prices could affect purchasing power, production costs and the country’s import bill. This concern is particularly significant for Pakistan, where petroleum remains one of the largest components of the import basket and changes in global oil prices quickly feed into domestic prices and the cost of doing business.
One of the more encouraging developments highlighted in the update is the narrowing of the current account deficit. The deficit declined from $853 million during July-August 2025 to $543 million in the corresponding period of the current fiscal year. On the surface, this represents an improvement in the external account, but a closer examination suggests that the underlying picture is considerably more complicated.
The improvement did not result from a reduction in the trade deficit. Instead, the trade deficit increased from $5.16 billion in the first two months of the previous fiscal year to $6.16 billion during the corresponding period of the current year. The deterioration is understandable in the context of higher international petroleum prices following the escalation of the Middle East conflict, while exports to the Middle East increased by around $200 million.
Two developments appear to have played the principal role in containing the current account deficit. The first was a substantial increase in remittance inflows, which rose by 14.7 percent. Remittances are a particularly valuable source of foreign exchange because they do not create a repayment obligation. Recent surveys have suggested that the regional conflict may have contributed to the increase, as Pakistani workers in the Gulf have generally remained in their host countries rather than returning home, unlike nationals of some other countries affected by the conflict.
The second factor was a slower pace of growth in debt. According to the update, the rate of debt accumulation declined to 7.7 percent this year from 13 percent last fiscal year. The Debt Management Office, operating under the Ministry of Finance, attributes this improvement to fiscal consolidation, the achievement of a primary surplus and lower interest payments.
However, these claims need to be examined in the broader context of government finances. Independent economists have questioned the extent to which higher tax collections can be described as evidence of genuine fiscal improvement. They point out that revenue from sales and withholding taxes has been affected by the Gulf crisis, while increased collections have partly resulted from intensified enforcement and scrutiny of sales tax at the factory level, particularly in sectors such as sugar, cement and fertiliser.
The composition of taxation matters because an increased reliance on indirect taxes can place a disproportionately greater burden on lower-income households. At a time when poverty remains a serious concern, higher taxation that is ultimately reflected in the prices of essential goods can worsen the financial pressure on vulnerable families.
This makes the World Bank’s estimate of poverty at around 44 percent particularly relevant. The government therefore needs to complement its revenue mobilisation efforts with measures that protect low-income households from the inflationary impact of taxation and higher input costs.
There is little doubt that the government has made progress in controlling the primary balance. However, a primary surplus is calculated after subtracting government expenditure from revenue but before accounting for interest payments on public debt. This distinction is important because debt servicing continues to consume a very large share of government resources.
Interest payments account for around 46 percent of total current expenditure and approximately 43 percent of the overall federal budget. Any sustained increase in borrowing costs would therefore put additional pressure on fiscal management. The assumption that the policy rate will remain unchanged may also become increasingly difficult to sustain if inflationary pressures continue to build.
Inflation has already risen sharply, increasing from 3.1 percent in August 2025 to 11.1 percent in August 2026. Much of the recent pressure has been linked to the impact of the regional conflict, particularly through energy and commodity prices. If inflation remains elevated, monetary policy could face renewed pressure, with potentially negative consequences for private investment and economic activity.
The government’s recent $3 billion dual-tranche sovereign Eurobond issue also highlights the continuing cost of accessing international capital markets. The issue comprises $1.75 billion for 5.5 years at an interest rate of 7.5 percent and $1.25 billion for 10 years at 7.9 percent. These rates are considerably higher than the financing generally available through multilateral and bilateral sources. Moreover, because the borrowing took place after the budget was presented, its full implications may not have been reflected in the original budget estimates.
Perhaps more worrying is the slowdown in large-scale manufacturing. The large-scale manufacturing growth rate in July 2025 stood at 8.93 percent, significantly higher than the annual estimate of 4.98 percent. By July 2026, however, growth had fallen sharply to 3.03 percent.
The decline cannot simply be viewed as a temporary fluctuation. Higher utility costs resulting from the implementation of IMF-linked energy reforms have increased the cost of production for industry. At the same time, private-sector credit flows have deteriorated, moving from negative Rs170 million during July-August 2025 to negative Rs364.5 million during the corresponding period of 2026.
This combination of higher production costs and weaker access to credit creates a difficult environment for private businesses. It also raises questions about how quickly the economy can transition from stabilisation to sustainable private-sector-led growth.
The Finance Division’s recommendation is to accelerate revenue mobilisation, ensure that relief measures remain temporary and targeted, and continue progress on energy and tax reforms. These are reasonable objectives if they are implemented in a manner that does not further weaken domestic demand or discourage investment.
However, the next phase of reform requires greater attention to the quality and composition of taxation. Pakistan needs a tax structure that raises more revenue through direct and ability-to-pay taxation rather than relying excessively on indirect taxes that ultimately pass the burden to consumers.
Similarly, energy tariffs should address inefficiencies, losses and governance failures within the energy sector instead of simply transferring rising costs to already burdened consumers.
Macroeconomic stability is important, but stability achieved through higher taxation, expensive borrowing and weaker private-sector activity cannot by itself provide a durable foundation for growth. The real test of the government’s economic strategy will be whether it can convert the current period of IMF-supported stabilisation into an economy capable of generating investment, employment, exports and sustained growth without repeatedly returning to the same cycle of crisis and external financing.
The September update therefore offers reasons for cautious recognition of progress, but it should also serve as a reminder that improving headline indicators is not the same as resolving structural problems. Pakistan’s challenge now is to ensure that the gains from stabilisation are not achieved at the expense of consumers, businesses and future economic growth.