Pakistan’s Ministry of Finance has struck a note of tempered hope in its latest Monthly Economic Update and Outlook, describing the nation’s economic trajectory as “cautiously optimistic.” This assessment comes against a backdrop of stabilizing macroeconomic indicators but persistent headwinds from food price volatility and agricultural setbacks.
With inflation projected to linger between 5.0 and 6.0 percent this month—driven primarily by strains on agricultural output and supply chains—the report underscores the fragility of recent gains. While industrial momentum and fiscal discipline provide a foundation for recovery, the shift from a current account surplus to a deficit of $733 million in the first four months of fiscal year 2026 (FY26) signals vulnerabilities that demand vigilant policymaking. As the country navigates global uncertainties and domestic reforms, the path to sustained growth hinges on translating early wins into broader resilience.
The inflation forecast encapsulates the delicate balance policymakers are striving to maintain. October’s Consumer Price Index (CPI) inflation clocked in at 6.2 percent year-on-year (YoY), up from 5.6 percent in September and markedly lower than 7.2 percent in October 2024. On a month-on-month (MoM) basis, it rose 1.8 percent, easing slightly from 2.0 percent the prior month. Food prices, which constitute nearly 40 percent of the CPI basket, remain the chief culprit, exacerbated by flood-induced disruptions and border closures affecting supply chains for staples like tomatoes (up 126.96 percent YoY) and sugar (34.83 percent). Energy costs add fuel to the fire: electricity tariffs for low-income households climbed over 11 percent, while liquefied petroleum gas (LPG) prices edged up 5.16 percent weekly. The ministry anticipates stabilization as the Rabi cropping season advances, bolstered by adequate input availability and government interventions like targeted subsidies. However, private forecasts paint a grimmer picture, with brokerage houses like Topline Securities eyeing 6.5-7.0 percent for November, citing real interest rates surging to 400-450 basis points—well above the historical 200-300 bps average. The International Monetary Fund (IMF) projects a gradual decline to 9.5 percent in 2025 overall, aligning with the State Bank of Pakistan’s (SBP) 5-7 percent medium-term target, but warns of upside risks from commodity volatility.
Agricultural performance, the linchpin of food security and inflation, presents a mixed bag that tempers the optimism. Kharif season estimates for 2025-26 reveal declines across key crops, underscoring the toll of erratic weather and resource constraints. Sugarcane output is projected to rise modestly by 0.6 percent to 84.74 million tonnes from 84.24 million last year, defying flood impacts through expanded acreage in Punjab and Sindh, which account for 93 percent of production. Cotton, vital for textiles and exports, is forecast at 6.85 million bales—a 3.3 percent drop from 7.08 million—hampered by a 34 percent acreage reduction amid competition from water-intensive alternatives like sugarcane. Rice production slips 3.2 percent to 9.41 million tonnes from 9.72 million, with severe flood damage wiping out up to 60 percent in Punjab, the epicenter of 65 percent of national output. Maize fares worse, down 6.7 percent to 8.43 million tonnes, reflecting pest pressures and input shortages. Bright spots include mung (up 14.9 percent to 150.8 thousand tonnes) and chillies (0.5 percent to 114.4 thousand tonnes), signaling niche resilience.
Looking ahead to Rabi, the Federal Committee on Agriculture has set an ambitious wheat target of 29.68 million tonnes across 9.65 million hectares, banking on favorable inputs and monsoon recovery. Yet, broader challenges loom: water scarcity in the Indus Basin, soil degradation from over-irrigation, and climate shocks like the 2025 floods, which submerged 220,000 hectares of rice and maize, threaten yields. Agriculture’s 22.9 percent GDP share and 37.4 percent employment footprint amplify these risks, with crop shortfalls inflating import bills—edible oils and pulses already strain forex reserves. Reforms like precision irrigation and pest-resistant seeds could reclaim 10-15 percent in yields, but implementation lags amid fiscal constraints.
Industrial revival offers a counterbalance, with large-scale manufacturing (LSM) registering 4.1 percent growth in July-September FY26, propelled by 15 sub-sectors including textiles, automobiles, and non-metallic minerals. September alone posted 2.7 percent YoY and 2.1 percent MoM gains, building on a Q1 average of 4.08-4.4 percent per updated Pakistan Bureau of Statistics (PBS) figures. Automobiles surged—cars up 74 percent, trucks 105 percent—fueled by eased import curbs and consumer rebound. Cement dispatches climbed 16.2 percent to 12.2 million tonnes, with exports up 20.8 percent, signaling construction momentum. Food processing grew 6.94 percent, while textiles edged 1.88 percent amid cotton woes. This uptick, from a -0.76 percent Q1 FY25 slump, reflects reform dividends: energy tariff rationalization and supply chain fixes under the IMF’s Extended Fund Facility (EFF). Yet, pharmaceuticals and iron-steel lagged, highlighting uneven recovery. Sustained 5-6 percent LSM growth could add 1 percentage point to GDP, but scaling requires $2-3 billion in annual FDI for tech upgrades.
Fiscal metrics reinforce the stabilization narrative. Net federal revenues rose 2.4 percent to Rs4,117.5 billion in July-September FY26, with Federal Board of Revenue (FBR) collections hitting Rs3,834.9 billion in July-October—a robust 11.4 percent YoY surge. Expenditures climbed 11.9 percent to Rs2,779.3 billion, yielding a fiscal surplus of Rs1,338.2 billion (down from Rs1,536.3 billion last year) and a primary surplus of Rs3,497.3 billion (up from Rs3,202.4 billion). Public debt shrank by Rs1,371 billion—the first quarterly dip in five years—via surplus deployment to retire high-cost obligations, easing rollover risks and bolstering reserves at $14.5 billion. Agricultural credit disbursements jumped 18.6 percent to Rs845.3 billion in July-October, supporting Rabi inputs. Money supply (M2) contracted 1.0 percent, aiding disinflation, though net foreign assets grew modestly by Rs204.5 billion.
The external sector, however, injects caution. The current account deficit ballooned to $733 million in July-October FY26—up 255 percent from $206 million last year—erasing prior surpluses. Exports grew a tepid 2.0 percent to $10.6 billion, lagging imports’ 9.6 percent surge to $20.7 billion, widening the trade gap to $10.1 billion from $8.5 billion. Remittances provided ballast, rising 9.3 percent to $12.96 billion, but primary income outflows ($3.09 billion) and services deficits ($1.164 billion) persisted. October’s $112 million deficit followed September’s $83 million surplus, highlighting volatility. IT exports and higher remittances buoy the outlook, but import compression—tied to production needs—risks stifling growth.
Broader growth prospects align with this tempered view. The Asian Development Bank (ADB) forecasts 2.7 percent GDP expansion in 2025, accelerating to 3.0 percent in 2026, while the IMF eyes 2.7 percent. Finance Minister Muhammad Aurangzeb projects 3.5 percent, crediting reforms like digital transitions and governance upgrades under the EFF. Foreign direct investment (FDI) climbed 20 percent in H1 FY25 to a two-year high, with inflows from Aramco, BYD, and Samsung signaling renewed confidence. Rating upgrades by Moody’s to “Positive” and others affirm this trajectory. Yet, challenges abound: geopolitical tensions, trade fragmentation, and law-and-order issues could derail buffers. Structural reforms—tax base broadening to 15 percent of GDP, SOE privatization, and green investments—must accelerate to hit 5-6 percent growth.

Pakistan’s economy stands at an inflection point: early reform dividends like debt reduction and industrial stirrings offer hope, but inflation’s creep and external strains test resolve. As the Rabi season unfolds and global commodities soften—World Bank predicts 4-6 percent drops in food and energy prices—the ministry’s cautious optimism could firm up. Prioritizing equitable resource allocation, climate-resilient agriculture, and export diversification will be key. With youth unemployment at 22 percent and poverty at 42 percent, inclusive growth isn’t optional—it’s imperative. The coming months will reveal if this momentum endures or falters under pressure.