August economic outlook: Inflation expected to remain elevated at 10-11pc

ISLAMABAD: Inflation is expected to remain elevated at 10-11 percent in August 2026 amid global commodity and energy price pressures, while declining foreign direct investment, a deepening contraction in private-sector credit, and looming climate risks from heavy rains and floods pose fresh threats to economic growth, agricultural output, inflation, and the external account.

This has been noted in the monthly Economic Update & Outlook August 2026, released by the Finance Division on Monday, which further stated that risks remain, particularly from geopolitical uncertainty, global energy prices, and their potential implications for inflation and the external account.

Continued prudent macroeconomic management and reform implementation will therefore remain important to safeguard stability and sustain the growth momentum into fiscal year 2027, it added.

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The outlook noted that maintaining policy discipline and advancing structural reforms will be important for sustainable and inclusive growth, strengthen the economy’s resilience to external shocks, and preserve the gains of macroeconomic stability.

The Economic Update highlighted a sharp 21 percent contraction in FDI, with inflows declining from USD 223.5 million in July 2025 to USD 178.6 million in July 2026, i.e., the first month of the current fiscal year.

Credit to the private sector stood at -Rs 393.4 million in July 2026, i.e., the first month of the current fiscal year, compared to -Rs 232.1 million in July 2025.

From July 1 to August 14, fiscal year 2027, broad money (M2) contracted by Rs2,629.5 billion, compared with a decline of Rs1,362.0 billion over the same period a year earlier. The contraction reflected decreases in both Net Foreign Assets (NFA) and Net Domestic Assets (NDA) of the banking system, which fell by Rs260.1 billion and Rs2,369.4 billion, respectively.

During July FY2027, imports of agricultural machinery and implements have increased by 25.9 percent, reaching USD 18.2 million against USD 14.4 million last year. During Kharif 2026 (April-July), urea offtake remained at 2,054 thousand tonnes (10.5 percent higher than Kharif 2025), whereas DAP offtake was 292 thousand tonnes (29.9 percent less than Kharif 2025). The reduction in DAP offtake may be attributed to its high prices. Agriculture credit disbursement reached Rs3,231.6 billion during July-June FY2026, up 24.7 percent from Rs2,592.2 billion last year.

The government remains committed to supporting farmers by ensuring timely access to quality seeds, agricultural credit, fertilisers, and modern machinery, though looming climatic threats, including heavy rainfall and floods, pose a risk to achieving the sector’s growth targets, it added.

Large-Scale Manufacturing (LSM) witnessed a growth of 4.98 percent during FY2026 against a contraction of 0.7 percent last year. Growth was observed in 16 of 22 sectors, with automobile (1.6 percent), food (1.2 percent), wearing apparel (0.9 percent), and coke & petroleum products (0.7 percent), among others, contributing most to overall growth. In June 2026, LSM declined by 3.5 percent on a year-on-year (YoY) basis and by 6.1 percent on a month-on-month (MoM) basis. The monthly decline in LSM was largely driven by contractions in wearing apparel, textiles, and pharmaceuticals, which together contributed about 4.6 percentage points and accounted for over three-fourths of the overall decline.

The outlook noted that external sector performance remained resilient in July 2026, supported by stronger exports and improved services and primary income balances. Goods and services exports increased to USD 3.94 billion from USD 3.48 billion a year earlier, with goods exports rising by 9.4 percent to USD 3.01 billion.

Key export gains were recorded in petroleum products, cotton yarn and readymade garments. Imports of goods and services rose to USD 7.31 billion from USD 6.46 billion, with goods imports up 13.4 percent to USD 6.15 billion. The increase was largely driven by machinery, transport equipment and metal imports, while petroleum imports declined by 5.2 percent. With imports growing faster than exports, the goods and services trade deficit widened to USD 3.37 billion from USD 2.98 billion a year earlier. However, the services balance improved, with its deficit narrowing to USD 228 million from USD 304 million, while the primary income deficit also eased. These improvements partly offset the wider merchandise trade gap.

Workers’ remittances continued to provide a strong buffer to the external account, increasing by 13.0 percent YoY to USD 3.6 billion. Higher secondary income, along with improvements in the services and primary income balances, helped narrow the current account deficit to USD 328 million in July 2026, compared with USD 529 million in the same month last year. Financial inflows remained positive in July 2026. Total FDI inflows stood at USD 304.0 million, while net FDI amounted to USD 178.6 million after accounting for investment outflows. Portfolio investment also recorded a net inflow of USD 25.9 million, reversing the outflow recorded a year earlier. Foreign exchange reserves remained at a comfortable level of USD 22.6 billion as of August 21, 2026, including USD 17.1 billion held by the SBP.

During July FY2027, FBR’s tax collection recorded a growth of 8.4 percent and stood at Rs820.9 billion. Both direct and indirect taxes grew by 3.0 percent and 11.9 percent, respectively. Within indirect taxes, sales tax and federal excise duty rose 18.3 percent and 3.4 percent, respectively, while customs duties fell 2.4 percent.

Government borrowing for budgetary support recorded a net retirement of Rs413.7 billion, compared with a retirement of Rs76.3 billion last year. Private sector credit also recorded a seasonal retirement of Rs393.4 billion, against Rs232.1 billion a year earlier. The Pakistan Stock Exchange remained under pressure during July 2026 amid renewed geopolitical tensions. The KSE-100 Index declined by 4,208 points to close at 176,094. Market capitalisation decreased by Rs442 billion to Rs19,755.7 billion by end-July.

Pakistan’s Stock Market index rose by a whopping 20.6 percent, market capitalisation by 13.4 percent, and incorporation of companies by 33.8 percent by August 28, 2026, compared to August 28, 2025.

In July 2026, the Bureau of Emigration & Overseas Employment registered 39,159 Pakistani workers for overseas employment, highlighting continued access to international labour market opportunities. During the same month, the Pakistan Poverty Alleviation Fund (PPAF), in partnership with 24 organisations, disbursed 5,778 interest-free loans worth Rs413 million, supporting financial inclusion, self-employment and sustainable livelihoods. Since 2019, cumulative loan disbursements have reached Rs126.67 billion. Meanwhile, during FY2026, Rs706 billion was disbursed under the Benazir Income Support Programme (BISP), reaffirming the Government’s commitment to providing targeted social assistance and strengthening the social safety net for vulnerable households.

External sector developments are expected to remain broadly supportive, underpinned by improved exports, particularly textiles, sustained remittance inflows and continued export facilitation measures. These trends should help contain pressures on the balance of payments and support reserve adequacy, the outlook noted.

Copyright Business Recorder, 2026