ISLAMABAD: Inflation is expected to remain elevated in the near term, with headline Consumer Price Index (CPI) inflation projected at 10 to 11 percent in September 2026, while its subsequent path will depend largely on international oil prices, the Finance Division (FD) said on Wednesday in its monthly Economic Update & Outlook for September 2026.
The report said higher government current spending and interest payments pushed the consolidated fiscal deficit to Rs596.6 billion in July 2026.
Elevated global oil prices remain the principal risk to the outlook, affecting purchasing power, input costs and the import bill, it said.
The report noted that the Prime Minister’s Fuel Relief Scheme directs support to lower-income households through a digital delivery system without cutting the petroleum levy. This protects purchasing power while preserving fiscal discipline, it said.
READ MORE: Pakistan inflation clocks in at 11.1% in August 2026
Going forward, the priorities are to accelerate revenue mobilisation, keep relief measures temporary and targeted, and sustain progress on energy and tax reforms. Together, these measures would consolidate stability and lay the basis for durable private-sector-led growth, the report said.
The external position strengthened at the start of fiscal year 2027. Goods exports increased 4 percent to USD 5.44 billion, while imports rose 11.4 percent to USD 11.6 billion. Despite the wider trade gap, stronger remittances and services exports helped narrow the current account deficit to USD 543 million, compared with USD 853 million a year earlier.
Goods imports picked up by 11.4 percent, reflecting higher oil prices and recovering domestic demand, and outpaced the 4 percent growth in goods exports. Two sources of strength more than absorbed this pressure.
Workers’ remittances surged 14.7 percent to USD 7.29 billion, exceeding the entire goods and services deficit of USD 6.75 billion. Services exports grew 28.8 percent to USD 1.81 billion, narrowing the services deficit by about a quarter.
These non-trade inflows are now the main factor keeping the current account deficit contained as the import bill rises, the report said.
Foreign investment also gained momentum, with foreign direct investment (FDI) rising 24 percent to USD 494.5 million during July-August FY2027, compared with USD 398.6 million a year earlier. Portfolio investment stood at USD 67.7 million, against an outflow of USD 86.6 million in the corresponding period. Total foreign investment increased 80.2 percent to USD 562.2 million.
The USD 3 billion Eurobond issuance in September boosted reserves. State Bank of Pakistan liquid reserves reached USD 21.39 billion on September 18, equivalent to about three months of goods and services imports, while total liquid reserves stood at USD 26.8 billion.
Stronger reserve buffers and renewed access to international capital markets place Pakistan in a better position to absorb the higher oil import bill and meet upcoming external debt obligations, the report noted.
On the domestic financing side, private-sector credit recorded a net retirement of Rs364.5 billion between July 1 and September 11, compared with Rs170 billion during the same period last year.
Large-scale manufacturing (LSM) output increased 3.03 percent year-on-year in July 2026, building on 8.9 percent growth in July 2025. Output also increased 9.5 percent from June.
The year-on-year increase indicates continued expansion, while the monthly movement also reflects seasonal and calendar trends. Automobile production surged 57 percent, while wearing apparel and tobacco output increased 22 percent and 35.8 percent, respectively.
Inflation picked up to 11.1 percent year-on-year in August 2026, from 9.2 percent in July and 3.1 percent a year earlier, reflecting the pass-through of higher global oil prices into domestic energy, transport and food costs.
The fiscal performance remained broadly consistent with consolidation efforts, supported by sustained revenue growth and the maintenance of a primary surplus. However, a substantial increase in mark-up payments resulted in a higher fiscal deficit compared with last year.
FBR net tax collection reached Rs1,722.4 billion during July-August FY2027, up 3.7 percent from Rs1,661.5 billion in the corresponding period of the previous year.
Sales tax receipts advanced 13.8 percent to Rs718.9 billion, while federal excise receipts edged up 2.2 percent to Rs117.9 billion. Direct tax collection stood at Rs689.6 billion, down 2.9 percent, while customs receipts amounted to Rs195.9 billion, down 4 percent.
Overall revenue growth was therefore supported mainly by sales tax collection. Federal non-tax revenue amounted to Rs213.7 billion in July FY2027, compared with Rs208.2 billion a year earlier.
On the expenditure side, current outlays of the federal government increased to Rs1,092 billion in July 2026 from Rs761.6 billion in July 2025. Interest payments within current expenditure stood at Rs792.9 billion, up from Rs490.4 billion.
Non-interest current spending remained at Rs299.1 billion, with growth of 10.3 percent. The consolidated fiscal deficit stood at Rs596.6 billion, or 0.4 percent of GDP, compared with Rs261.5 billion, or 0.2 percent of GDP, last year.
The consolidated primary balance remained in surplus at Rs196.3 billion, or 0.1 percent of GDP, against a surplus of Rs228.9 billion, or 0.2 percent of GDP, a year earlier, indicating that revenues continued to cover non-interest expenditures.
Broad money (M2) contracted by 5.3 percent between July 1 and September 11, FY2027, compared with a 2.8 percent contraction in the same period last year.
The decline stemmed entirely from net domestic assets, which fell by Rs3,355.4 billion. Net foreign assets expanded by Rs914.4 billion, supported by a contained current account deficit, financing inflows and SBP foreign exchange purchases.
Within domestic assets, government budgetary borrowing was the main driver, with a net retirement of Rs2,734.9 billion, compared with Rs2,373.4 billion a year earlier. This continued reduction in reliance on bank financing frees space for private-sector lending.
Private-sector credit recorded a net retirement of Rs364.5 billion, compared with Rs170 billion last year, reflecting seasonal repayment of working capital and commodity financing ahead of the Kharif procurement season. This larger seasonal repayment accounts for the deeper contraction in M2 this year.
The outstanding stock of private-sector credit was nevertheless 13 percent higher than a year earlier, indicating that credit supply continues to reach businesses and households.
The Monetary Policy Committee kept the policy rate unchanged at 11.5 percent on September 14, with elevated global crude oil prices remaining the main risk to the inflation outlook.
The committee judged that the current stance remains appropriate to keep inflation expectations anchored and bring inflation back to the 5-7pc medium-term target. Core inflation came in slightly below expectations, and the policy rate remains positive in real terms.
Maintaining the stance guards against second-round effects from higher energy prices, preserves external stability and supports the recovery in private credit, the report said.
The equity market remained broadly stable in August. The KSE-100 index gained 882 points, or about 0.5 percent, to close at 176,976, while market capitalisation advanced to Rs19,830.2 billion.
The modest gain reflected continued investor participation, supported by the sovereign rating upgrade and improving macroeconomic indicators. It also pointed to caution amid volatile international energy prices and global financial conditions.
The Bureau of Emigration and Overseas Employment registered 27,656 Pakistani workers for overseas employment in August 2026, supporting access to international labour markets.
In the same month, the Pakistan Poverty Alleviation Fund, through 24 partner organisations, disbursed 5,169 interest-free loans totalling Rs381 million. These loans support small-scale enterprises, self-employment and financial inclusion.
Cumulative disbursements under the programme reached Rs127 billion since 2019. Alongside expanding housing and agricultural finance, these initiatives broaden access to economic opportunities.
Economic activity is expected to strengthen further in FY2027 as the recovery broadens across agriculture, manufacturing and private-sector credit. Remittances and services exports are expected to continue supporting household incomes and the external accounts.
Stronger reserves and renewed access to international capital markets would provide a better buffer against external shocks than in previous episodes. Elevated global oil prices remain the principal risk to the outlook through their effect on purchasing power, input costs and the import bill.
Early indicators point to a favourable start to FY2027 for agriculture, driven by expansion in the area under important Kharif crops and improved access to financing.
Higher acreage under rice and sugarcane, together with encouraging early cotton arrivals, points to positive growth in important crops, which carry the largest weight in agricultural crop value added.
Financing conditions have also been supportive. Agricultural credit disbursements increased 16.4 percent to Rs271.9 billion in July FY2027, up from Rs233.7 billion a year earlier.
Input use strengthened in line with the larger sown area. During Kharif 2026 (April-August), urea off-take was 2,755 thousand tonnes, up 2.9 percent from Kharif 2025. DAP off-take was lower at 417 thousand tonnes, down 24.5 percent from Kharif 2025.
Mechanisation also grew, with tractor sales expanding 4.7 percent to 2,294 units in July-August FY2027, while imports of agricultural machinery and implements were recorded at USD 29.2 million.
Overall, these developments provide a sound basis for a stronger Kharif harvest and a positive contribution from agriculture to growth in FY2027.
Copyright Business Recorder, 2026