The first half of 2025-26 has come to an end. This is an appropriate time to review the progress of the economy, especially in relation to the targets set for the year.
There are two key sets of targets for the year. The first set is in the Annual Plan of the government, prepared by the Planning Commission. A more recent set of targets for 2025-26 are those presented in the IMF Staff Mission Report, following the successful completion of the second review of the ongoing IMF Extended Fund Facility.
The first target for 2025-26 is the GDP growth rate. The Annual Plan had originally envisaged a relatively high growth rate of 4.2 percent, as compared to the actual growth rate of 2.7 percent achieved in 2024-25, which has recently been revised upwards to 3.1 percent. The expectation also is of a balanced sectoral growth with the growth rate of agriculture, industry and services at 4.5 percent, 4.3 percent and 4.0 percent, respectively.
The damage inflicted by the floods has led the Planning Commission to revise downwards the targeted GDP growth rate to between 3.5 percent and 3.9 percent. This will primarily be due to a fall in the agricultural growth rate with consequential impact on other sectors of the economy. The 1st quarter growth rate has been released a few days ago, at 3.7 percent. However, the negative impact of the floods is more likely to be visible in the second quarter.
The IMF projection of the GDP growth rate in 2025-26 is somewhat lower at 3.2 percent. This is also a reflection of the lowering down from the original estimate of 3.6 percent, presumably again because of the negative impact of the floods.
The actual outcomes for the first six months are partially available. Cotton arrivals appear to be somewhat better in relation to last year. The indicator sometimes used as a proxy of changes in the pace of economic activity is the sale of POL products. The Oil Companies Advisory Committee (OCAC) reports that the growth rate of sales of these products was 3.3 percent in the first quarter of 2025-26.
Information on the Quantum Index of Manufacturing (QIM) is available for the first four months of 2025-26. The Index has shown a relatively high growth rate of 5 percent. However, there is a wide variation in industry-wise growth rates. The automobile industry has shown an unprecedented growth rate of almost 80 percent, probably because of relaxation of import curbs. However, key industries like cotton yarn, cotton cloth, fertilizer and food products have shown very low growth rates.
The negative development is the precipitous decline in exports by as much as 14.5 percent in November 2025 and by 6.2 percent in the first five months. In particular, there has been a fall in exports of rice by 49 percent, with volume falling by 40 percent. This indicates that the fall in rice output may have been larger than anticipated. Also, exports of textiles have shown little growth.
The above trends indicate that the expectations of the GDP growth rate by the Planning Commission and the IMF are somewhat on the high side. A more likely projection of the GDP growth rate in 2025-26 is 3 percent. This will imply that the rate of unemployment could rise by 1.2 percent points in 2025-26. The number of unemployed could increase by almost 1 million.
The next set of projections relates to the level of investment. The Annual Plan expects the level of gross fixed capital formation to rise to 13 percent of the GDP, from 12 percent of the GDP in 2024-25. Bulk of the increase is anticipated from private investment.
The IMF also expects the level of fixed investment to rise to just above 13 percent of the GDP. It, however, anticipates government investment to fall by 0.2 percent of the GDP.
Outstanding bank credit to the private sector as of November 2025 has shown a small decline of 2 percent since November 2024. This has happened despite the relatively low interest rates. However, this drop in credit to the private sector is not reflected in imports of machinery. They have shown a big increase of 13.5 percent. With the exception of power generating machinery all other types of machinery imports have increased.
There has been an increase in development expenditure by the federal and provincial governments combined of only 6 percent. It stands at less than 0.3 percent of the GDP in the first quarter of 2025-26.
Overall, it appears that the target of gross fixed capital formation of 13 percent of the GDP will become what difficult to achieve. It is likely to be closer to 12.5 percent of the GDP. The shortfall is likely in public investment, especially in light of the big and growing shortfall in tax revenues.
We turn now to the projected rate of inflation. The Annual Plan has targeted for a significant jump in the rate of inflation to 7.5 percent from 4.5 percent in 2024-25. IMF expects it to be lower at 6.3 percent, as compared to an earlier Program estimate of 7.7 percent. However, the end of period rate of inflation is expected to 8.9 percent.
The first months of 2025-26 have witnessed a somewhat rising trend in the rate of inflation, from 4.1 percent in July 25 to 5.6 percent in December 2025. As such, the average rate has been close to 5 percent, 0.5 percent points above last year’s average.
There is noticeable upsurge in prices of wheat and wheat flour, sugar, gas charges and fresh fruits of above 20 percent. Fortunately, there has been a significant fall in prices of pulses, potatoes, teas and electricity charges.
International prices have shown a visible downward tendency. The World Bank International Commodity Price Index has declined by almost 7.0 percent in July – September 2025, as compared to the level in July – September 2024.
The sharpest drop is in energy prices of over 12 percent. Currently, oil is trading at the low price of USD61 per barrel. Domestic prices of POL products have been brought down significantly. The rupee has been nominally stable. Overall, the domestic prices of imports have not shown a rising tendency.
Domestically, the rate of monetary expansion has been 2 percent lower up to mid-December 2025 compared to the rate of expansion in the corresponding period of 2024-25. However, a critical unknown is what is likely to be the policy with regard to electricity pricing in the remaining half of 2025-26. Currently, up to November, the CPI shows a fall in electricity charges of 9.4 percent. Overall, the Annual Plan estimate of inflation at 7.5 percent is relatively high and it is likely to be closer to the IMF estimate of 6.3 percent.
Based on the above analysis, the GDP is expected to grow by 3 percent in 2025-26. This will not be high enough to prevent an increase in unemployment. The number of unemployed could increase by almost 1 million during the year. The rate of inflation is likely to be close to 6 percent.
The rate of investment will show a small increase over last year’s level.
Copyright Business Recorder, 2026
The writer is Professor Emeritus at BNU and former Federal Minister