EDITORIAL: The latest editions of the Planning and Finance Divisions’ Monthly Development and Economic updates report outgoing fiscal year FY2025-26 performance with a reasonably strong set of numbers.
Growth improved to 3.7 percent, large-scale manufacturing returned to expansion, the fiscal deficit narrowed, reserves strengthened and average inflation remained within target. None of this is trivial after the prolonged adjustment of recent years.
The detail, however, also shows that the economy is entering FY2026-27 with the same imbalance that has cut short almost every previous recovery: imports have revived, exports have not, and remittances are once again carrying the external account.
Goods exports fell by 4.6 percent during FY2025-26, while goods imports rose by 9 percent. On a broader basis, exports of goods and services were virtually unchanged at USD 40.9 billion, against an 8.5 percent increase in imports to USD 76.4 billion. The trade deficit widened by close to USD 6 billion and the current account moved from a surplus of USD 1.84 billion to a deficit of USD 139 million. The deficit is modest; the pattern behind it is not.
Workers’ remittances increased by 8.6 percent to a record USD 41.6 billion and prevented a far larger deterioration in the external balance. That cushion is welcome, particularly with reserves now in a much stronger position, but it is difficult to describe the economy as structurally improved when labour exports continue to compensate for the weakness of merchandise exports and productive investment. Net foreign direct investment declined by nearly a third to USD 1.6 billion during the year. The Pakistani worker abroad remains a more dependable source of foreign exchange than the productive economy at home.
Rising imports are not necessarily evidence of another consumption binge. Machinery, raw materials, and intermediate goods are required to restore production and expand capacity, and the recovery in manufacturing suggests that at least part of the increase is linked to higher economic activity. That case would be more convincing if exports and investment were responding with comparable force. Instead, imports have accelerated, goods exports have contracted, and foreign investment has weakened.
This is the old growth constraint in plain sight. Demand and import requirements recover quickly once financial conditions improve, while export capacity, productivity and investment take far longer to respond. The trade gap begins to widen, pressure gradually returns to the external account, and policymakers are eventually compelled to suppress the demand they had spent the preceding years trying to restore. Stronger reserves can provide more time before that sequence becomes binding, but they do not alter its underlying arithmetic.
Services exports offer the clearest exception. Information technology and other business services recorded strong growth, with IT exports reaching USD 4.6 billion. The gains are significant and should be treated as the beginning of a wider export opportunity rather than another convenient success story. Services remain too small to offset a weak goods-export base, and the familiar constraints of energy costs, taxation, logistics, skills and regulatory uncertainty will eventually limit them as well unless policy catches up.
The PBS price review for July provides a parallel warning on the domestic side. Headline inflation eased from 11.1 percent in June to 9.2 percent, but consumer prices increased by 1.2 percent during the month after declining in June. Food prices rose by 4.16 percent and perishable food prices by 17.69 percent, while the Sensitive Price Indicator increased by 2.4 percent over the month and remained 12 percent higher than a year earlier. The national headline improved in year-on-year terms; the basket of essentials did not.
Food alone contributed 1.45 percentage points to monthly inflation, with declines in transport and housing-related costs pulling the overall increase back to 1.2 percent. This is an important distinction for an economy in which a large share of household income is spent on basic consumption. Rural inflation remained higher than urban inflation, while rural food prices increased by 3.86 percent during July. A softer CPI headline is welcome, but it does not make a four-percent monthly increase in food prices any less punitive.
Nor is this simply an interest-rate problem waiting to be handed back to SBP. The Finance Division’s own report records a 37.3 percent decline in DAP offtake during the Kharif season, attributing it to high prices, alongside below-normal rainfall and elevated water stress for major crops. These pressures sit on top of weak storage, inefficient logistics, fragmented markets and poor agricultural productivity. Monetary policy can contain the second-round effects of food inflation, but it cannot produce fertiliser, conserve water, raise yields or reduce losses between farm and market.
The Planning Division’s development update is relevant here, although not especially reassuring. More than 97 percent of the federal PSDP for FY2026-27 has been earmarked for ongoing projects, and over 60 percent of resources remain allocated to infrastructure. The decision to prioritise completion rather than add another layer of thinly funded schemes is sensible; Pakistan’s development portfolio has suffered enough from political additions, delayed implementation and repeated cost escalation. Yet a largely pre-committed programme also leaves limited room to redirect spending towards the supply constraints starkly visible in agriculture, exports, logistics, technology and human capital.
Fiscal consolidation deserves the same qualified reading. The fiscal deficit narrowed to 1.6 percent of GDP during July-May from 3.8 percent a year earlier, helped by higher revenues and lower mark-up payments. Development spending, however, also declined by 8.9 percent. Lower spending is not automatically better spending, and a smaller deficit achieved partly by compressing public investment may secure the present without doing much to change the future.
The government has set a growth target of 4 percent for FY2026-27, which is neither excessive nor particularly ambitious after years of weak per capita performance. The concern is not the target but the route taken to reach it. Growth led by domestic demand and import-intensive activity, without a matching increase in exports, investment and agricultural capacity, would merely bring the next external constraint forward.
The official monthly reports show that Pakistan begins the year with better buffers and more policy room than it had before. They also show little evidence that the structure beneath those buffers has materially changed. The test of FY2026-27 will not be whether growth touches 4 percent, but whether exports begin to move with imports, investment begins to move with demand, and food supply begins to move with household need. Otherwise, the economy will have secured another recovery on familiar terms, with the familiar ending merely deferred.
Copyright Business Recorder, 2026