ISLAMABAD: The Finance Division has sounded the alarm over the persistent inflation by projecting Consumer Price Index (CPI) at 9-10 percent in July 2026 amid rising global oil prices, as Pakistan’s economy faced a 33.9 percent plunge in foreign direct investment declining from USD 2.477 billion in 2024-25 to USD 1.636 in the last fiscal year and a decline of 4.6 percent in exports from USD 32.3 billion in 2024-25 to USD 30.8 billion in 2025-26.
The Finance Division uploaded the Monthly Economic Update and Outlook July 2026, which stated that renewed geopolitical tensions in the Middle East pose downside risks to inflation and the external outlook. “Renewed US-Iran hostilities once again pose downside risks through global energy prices, trade and financial market volatility.
However, stronger macroeconomic fundamentals, improved external buffers, government readiness and continued policy vigilance have enhanced Pakistan’s capacity to manage such shocks effectively,” it added.
READ MORE: Pakistan’s inflation expected to return to single digits in July
The Economic Update highlighted a sharp 33.9 percent contraction in FDI, with inflows declining from USD 2.477 billion to USD 1.636 billion, while exports also fell 4.6 percent to USD 30.8 billion in 2025-26, compared to USD 32.3 billion in the previous fiscal year.
The downward trend continued in June 2026 when it declined to USD 13.5 million against USD 210 million in June 2025.
Total FDI inflows during FY2026 were recorded at USD 3.6 billion, while net FDI amounted to USD 1.6 billion, with inflows from China (USD 862.0 million), Hong Kong (USD 339.4 million) and the UAE (USD 235.9 million) as the main sources. By sector, power (USD 958.3 million) and financial services (USD 805.5 million) attracted the most FDI, while private and public FPI recorded net outflows of USD 594.8 million and USD 591.4 million, respectively. As of July 17, 2026, foreign exchange reserves stood at USD 22.7 billion, including USD 17.3 billion held by the SBP.
Portfolio investment in the fiscal year 2025-26 remained in the negative territory, recorded outflow of USD 1,186 million as against USD 730.8 million in the same period of the previous year, while Pakistan’s Stock Market index rose by a whopping 27.6 percent, market capitalisation by 21.6 percent and incorporation of companies by 24.1 percent.
Total foreign investment dropped substantially to USD 450.6 million in fiscal year 2025-26, down from USD 1.746 billion a year earlier.
Workers’ remittances reached USD 3.5 billion in June 2026, up 2.0 percent from the same month last year. On a cumulative basis, inflows in FY2026 reached USD 41.6 billion, up 8.6 percent from the previous year. The major corridors of workers’ remittances in June 2026 were Saudi Arabia (USD 829.6 million) with a total share of 24 percent, followed by the United Arab Emirates (USD 792.2 million) with a 23 percent share and the United Kingdom (USD 514.9 million).
The report further noted that in view of the prevailing climatic conditions, the forecast of below-normal rainfall during July-September 2026 in most parts of the country (as per PMD’s seasonal outlook for JAS report, dated June 30, 2026) indicates an elevated risk of water stress for major Kharif crops (sugarcane, rice, cotton, and maize), thereby increasing irrigation requirements.
In addition, spatial temperature gradients may also generate strong winds, dust storms, thunderstorms and hailstorms, potentially affecting seasonal crops, vegetables and orchards.
Large-Scale Manufacturing (LSM) grew by 5.8 percent during July-May FY2026 compared with a contraction of 1.1 percent last year.
During the period, 16 out of 22 sectors recorded growth. In May 2026, LSM witnessed a growth of 1.2 percent on a month-on-month (MoM) basis, while on a YoY basis it declined by 1.0 percent mainly due to lower production of pharmaceuticals, textiles, and iron & steel products.
Headline CPI inflation stood at 11.1 percent on a YoY basis in June 2026, easing from 11.7 percent in May FY2026, but remained above 3.2 percent in June FY2025. Average inflation in FY2026 stood at 7.1 percent compared to 4.5 percent during the same period last year.
FBR tax revenue reached Rs13,010.4 billion during July-June FY2025-26, achieving 10.3 percent tax-to-GDP ratio, with an increase of 10.8 percent as direct and indirect taxes grew by 13.7 percent and 7.9 percent, respectively. Within indirect taxes, sales tax, customs duties and federal excise duty increased by 9.0 percent, 3.6 percent and 9.6 percent, respectively.
During July-May FY2026, net federal revenue receipts increased by 7.3 percent to Rs9,385.4 billion, supported by higher tax and non-tax revenues.
Federal non-tax revenue rose by 6.3 percent to Rs4,852.0 billion. Total expenditures declined by 9.4 percent to Rs12,732.9 billion.
Within total, current expenditures reduced by 9.4 percent mainly due to a decline in markup payments by 21.7 percent, while development spending declined by 8.9 percent.
Consequently, the fiscal deficit narrowed to 1.6 percent of GDP (Rs2,032.8 billion) during July-May FY2026 as compared to a deficit of 3.8 percent of GDP (Rs4,278.0 billion) during the corresponding period last year. Primary surplus was recorded at 3.3 percent of GDP (Rs4,130.8 billion) compared to 3.2 percent of GDP (Rs3,594.6 billion) in FY2025.
The current account recorded a deficit of USD 649 million in June 2026, bringing the cumulative FY2026 deficit to modest USD 139 million. Exports of goods and services recorded at USD 40.9 billion, broadly unchanged from USD 40.8 billion in the same period last year, with goods exports amounting to USD 30.8 billion and services exports reaching USD 10.0 billion (18.7 percent increase on a YoY basis).
Imports of goods and services were recorded at USD 76.4 billion compared to USD 70.4 billion last year, of which goods imports were USD 64.5 billion. Consequently, the goods and services trade deficit widened to USD35.5 billion, up from USD29.6 billion a year earlier.
According to PBS data, gains in key exports were raw cotton (199.2 percent), cotton yarn (12.4 percent), petroleum products (54.8 percent) and sports goods (10.1 percent), while major imports rose in the transport sector (66.4 percent) in FY2026 over the previous fiscal year.
The Monetary Policy Committee (MPC), in its meeting held on 27th July 2026, decided to keep the policy rate unchanged at 11.5 percent.
The Committee assessed that the macroeconomic outlook has improved, supported by recent high-frequency indicators, the transmitted impact of earlier de-escalation through declining global oil prices, and the relative easing of supply chain disruptions. These factors have contributed to an improvement in recent economic indicators, including inflation.
However, the outlook remains susceptible to heightened risks, particularly due to the resurgence of conflict in the Middle East. During FY2026, broad money (M2) grew by 14.7 percent (Rs5,957.0 billion), compared with growth of 12.9 percent (Rs4,624.5 billion) in FY2025. Within M2, Net Foreign Assets (NFA) of the banking system increased by Rs1,673.2 billion, compared with Rs1,602.8 billion last year.
Net Domestic Assets (NDA) of the banking sector increased by Rs4,283.8 billion, compared with a Rs3,021.7 billion increase last year. Government borrowing for budgetary support amounted to Rs2,251.4 billion, lower than Rs4,354.4 billion last year.
Private sector credit increased by Rs1,463.3 billion, compared with Rs1,081.9 billion last year. Within total credit, loans to private sector business observed net borrowing of Rs1,176 billion in FY2026 as compared to net borrowing of Rs1,007 billion in FY2025. Within total loans, working capital loans witnessed net borrowing of Rs632 billion against net borrowing of Rs617 billion in the last year.
Major borrowers include: sugar sector, rice and wheat processing, pharmaceutical, electrical equipment, wholesale and retail trade, construction and cement sector. On the other hand, demand for fixed investment loans increased to Rs625 billion against net borrowing of Rs414 billion in the last year. Major demand was driven by the textile, chemical, cement, construction, and transport & storage sectors.
The Pakistan Stock Exchange (PSX) remained bullish in June 2026. The benchmark KSE-100 Index gained 6,339 points to close at 180,302, supported by ample liquidity, attractive valuations across key sectors, and resilient investor sentiment despite intermittent geopolitical volatility. Market capitalisation increased by Rs1,031.5 billion to Rs20,197.8 billion by the end of June FY2026.
In June 2026, the Bureau of Emigration & Overseas Employment registered 38,410 workers for overseas employment, reflecting continued opportunities for Pakistani workers in international labor markets.
The Pakistan Poverty Alleviation Fund, in partnership with 24 organisations, disbursed 7,482 interest-free loans worth Rs535 million during June 2026, reinforcing its commitment to expanding financial inclusion and supporting sustainable livelihoods. Since 2019, cumulative disbursements have reached Rs126.2 billion.
During July-May FY2026, Rs519.5 billion was spent under the BISP, reaffirming the government’s commitment to protecting vulnerable households through targeted social assistance.
Copyright Business Recorder, 2026