Pakistan’s economy demonstrated notable resilience in the first half of fiscal year 2026 (H1-FY26), with key indicators showing improvement despite emerging external challenges, according to a recent economic report. The report highlights a combination of easing inflation, fiscal surplus, and strengthened external buffers supported by ongoing reforms and favorable international conditions.

Real GDP grew by 3.8% in H1-FY26, nearly doubling the 1.9% increase recorded during the same period last year. This growth was primarily driven by a pickup in industrial activity, complemented by progress in both the services and agriculture sectors. However, the report also noted a significant decline in rice exports, which contributed to a reduction in overall export earnings. Imports increased in volume, reflecting the strengthened economic activity, while rising remittance inflows from Pakistani workers abroad helped offset deficits in trade, services, and primary income balances, keeping the current account deficit at moderate levels.

Monetary policy maintained a cautious stance under the State Bank of Pakistan (SBP), which preserved an adequately positive real interest rate with a forward-looking approach. The report credits a mix of prudent fiscal and monetary policies, improved external account conditions, exchange rate stability, falling international commodity prices, and adjustments to administered electricity tariffs for a moderation in inflation. The National Consumer Price Index (NCPI) inflation averaged 5.2% in H1-FY26, representing a decline of about two percentage points compared to the previous year.

Fiscal consolidation efforts have been effective in turning the fiscal balance into a surplus during H1-FY26—the first surplus recorded since fiscal year 2002. Despite this achievement, the primary surplus remained steady relative to the previous year. The report underlines the importance of sustained structural reforms to address persistent challenges such as low savings and investment rates, weak competitiveness, falling exports, subdued foreign direct investment, and a low tax-to-GDP ratio—all critical for Pakistan’s transition to a sustainable, high-growth trajectory.

The report also devoted a chapter to Pakistan’s vulnerability to climate change. It ranks the country as the 15th most affected globally by climatic events, pointing out its high emissions intensity relative to GDP and low preparedness to handle the economic consequences. The report calls for considerable investments in climate mitigation and adaptation to address these structural inefficiencies and the country’s carbon-intensive development path.

Looking ahead to fiscal year 2026 (FY26) as a whole, high-frequency economic indicators such as the Purchasing Managers’ Index (PMI), Large-Scale Manufacturing (LSM), and construction activity showed continued momentum through February 2026. However, the onset of the Middle East conflict appeared to impact output in the final month of the fiscal year. SBP projects real GDP growth for FY26 to remain near the lower bound of the earlier estimate range, between 3.75% and 4.75%. The current account deficit is anticipated to stay close to the lower bound of the projected 0% to 1% of GDP range, despite ongoing economic momentum and elevated commodity prices.

The report flags the Middle East war as a significant risk to Pakistan’s medium-term macroeconomic outlook. An extended conflict could trigger a surge in international oil prices and related commodity costs, potentially pushing inflation above the medium-term target range of 5% to 7% during fiscal year 2027. This development poses challenges to maintaining macroeconomic stability amid evolving global uncertainties.