State of the economy

EDITORIAL: The September Update and Outlook has been uploaded by the Finance Division on its website and presents a mixed bag of achievements and failures – achievements linked to the implementation of the International Monetary Fund (IMF) conditions under the ongoing Extended Fund Facility programme and failures associated largely with the ongoing Middle East conflict with the claim that ”elevated global oil prices remain the principal risk to this outlook, through their effect on purchasing power, input costs and the import bill.”

The achievements include a decline in the current account deficit – from negative 853 million dollars July-August 2026 to negative 543 million dollars in the same two months in the current year.

However, this was not on the back of a lower trade deficit, which rose from 5.16 billion dollars to 6.16 billion dollars during the first two months in last fiscal year as opposed to 2026-27 – no doubt due to the rising price of Pakistan’s major import items, petroleum and products, as a consequence of the conflict while exports to the Middle East rose by 0.2 billion dollars. The two major components of the narrowing current account deficit were two-fold.

First, remittance inflows by 14.7 percent, a desired form of earning foreign exchange reserves, which surveys indicate have risen because of the conflict as Pakistani emigrants have not opted to return to the country unlike nationals of some other countries.

And, second, higher debt whose pace of growth has slowed to 7.7 percent this year against a growth of 13 percent last fiscal year.

The reason so claims the Debt Management Office under the administrative control of the Ministry of Finance, indicates fiscal consolidation, primary surplus and a reduction in interest payments. These claims have been debunked by independent economists who cite the rise in tax collections in spite of lower revenue from sales and withholding taxes due to the Gulf crisis to enforcement measures focused on greater scrutiny of sales tax collections at the factory level on three sectors to-date notably sugar, cement and fertilizers.

The net impact of these indirect taxes, whose incidence on the poor is greater than on the rich, has been to raise food inflation negatively, impacting on the poor and vulnerable. With poverty level calculated at a high of 44 percent by the World Bank the government would be well advised to take appropriate mitigating measures. Be that as it may, there is no doubt that the government has controlled the primary surplus; however, this is defined as revenue minus expenditure not including interest payments on the national debt, which comprised 46 percent of total current expenditure and 43 percent of the total budget (assuming a policy rate that is not likely to be raised though this assumption may fall by the wayside as inflation has risen due to the conflict from 3.1 percent in August 2025 to 11.1 percent in August 2026).

It is also relevant to note that the government’s recent decision to issue 3 billion-dollar dual tranche sovereign Eurobond issue on the London Stock Exchange has carried the following rate that is higher than the rate available from multilaterals/bilaterals: 1.75 billion dollars for 5.5 years at 7.5 percent and 1.25 billion dollars for 10 years at 7.9 percent though this is in all probability not included in the budget estimate because the issuance post-dates the budget.

What must be also concerning for the government is the large-scale manufacturing growth calculation for July 2025 at 8.93 percent, well above the year’s estimate of 4.98 percent while the rate for July 2026 has plummeted to 3.03 percent, which can be explained by a rise in the utility costs (due to implementation of IMF conditions) and the decline in the flow of credit to the private sector from negative 170 million rupees July-August 2025 to negative 364.5 million rupees July-August 2026.

The Update’s recommendation going forward is: “the priorities are to accelerate revenue mobilization, keep relief measures temporary and targeted, and sustain progress on energy and tax reforms.

Together, these would consolidate stability and lay the basis for durable private sector-led growth.” One would have hoped that going forward the recommendation should have been to formulate and implement a tax structure that would ensure higher collections under direct or ability to pay taxes, and the tariffs must focus on reducing inefficiencies and not on passing the buck onto the hapless consumers.

Copyright Business Recorder, 2026