State of the economy: a mixed picture

EDITORIAL: Recent data releases indicate a marked improvement in critical macroeconomic indicators that reinforce the government’s view that stabilisation has been achieved. The current account deficit has narrowed by a whopping 34 percent during the first two months of the current year reflective of a rise in remittance inflows – a rise that was not projected, given the prevailing Middle East conflict.

Reports suggest that this rise is partly attributable to emigrants from other countries leaving the Gulf States due to the war while Pakistanis continue their presence in the region coupled with the increased use of official channels to send remittances.

While this situation will not last once the conflict is resolved; however, the turmoil has not only widened but is also being projected by some political pundits to last till the end of the Trump term.

Additionally, the dual-tranche 3 billion dollars Eurobond issuance strengthened the foreign exchange reserves and the current account, with interest rates lower than the domestic borrowing rate. This consists of a 1.75 billion dollars, 5.5-year bond at a 7.5 percent coupon rate, and a 1.25 billion, 10-year bond at a 7.9 percent coupon rate.

Notably, these bonds are payable in US dollar, while the Pakistani rupee depreciates by an average of 3 percent to 4 percent per year.

July-August 2026 foreign direct investment also rose by 24 percent year-on-year supported by stronger inflows in August. The monthly economic outlook and update for August gave the July 2025 FDI of 178.6 million dollars against 223.6 million dollars in July 2026 - a decline of 45 million dollars.

The July-August 2026 figure as per the State Bank of Pakistan was 495 million dollars, giving a total of 316.4 million dollars for August 2026 against 398.6 million dollars for the same period of 2025 (though there is a discrepancy of 34.3 million dollars with the Finance Division figure of 364.3 million dollars). While there is little need for complacency as this amount is extremely low compared to other regional countries yet one would hope that the upward trend will continue.

Large scale manufacturing (LSM) grew by 3.03 percent year-on-year and 9.51 percent month-on-month. This is an extremely positive feature of the economy as it reflects higher Gross Domestic Product (GDP) growth and new employment opportunities.

Sadly, this improvement is being openly challenged by the LSM with the textile sector claiming that more than 100 units have been closed down to a massive rise in their input costs (due to administrative measures as part of the International Monetary Fund conditions) – a claim strengthened by the fact that as per the monthly update of the Finance Division credit follow to the private sector rose from negative 232.1 million rupees July to August 2025 to negative 393.4 million rupees in the same period of 2026.

The largest growth sectors were automobiles (57 percent) followed by garments (22 percent).

There is no doubt that the global economy is suffering from major supply disruptions due to not only the Middle East but also the Russia-Ukraine conflict and there is little likelihood of either conflict ending anytime soon.

This necessitates the need to strategize the way forward instead of engaging in fire-fighting actions, particularly extending subsidies, from a kitty whose fiscal space narrows further as a consequence. There is a need to formulate an energy sector plan to better cope with global fuel shortages—which, when available, come at a very high price—and to reduce expenditures across the board.

This, in turn, would reduce the need to increase revenue through traditional means like raising taxes or widening the ambit of existing taxes.

The general public is already experiencing an almost daily rise in the cost of fuel. Unless mitigating measures are put in place—notably, a plan to slash demand for petrol and fuel used for electricity generation—the situation will only become worse.

Copyright Business Recorder, 2026