Business & Finance Print edition: 2026-10-30

FD’s update: Oct inflation projected to stay elevated at 9.5-10.5pc

Published October 30, 2026 Updated October 30, 2026 05:43am

7 min

By Tahir Amin

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ISLAMABAD: Inflation is projected to remain elevated at 9.5-10.5 percent in October 2026 - attributed to persistent geopolitical tensions, recurring conflict in the Gulf region, volatile oil prices, trade disruptions and elevated global inflation - is considered as a downside risk for the economy, the Finance Division has warned.

In its Monthly Economic Update and Outlook for October 2026, the Finance Division said the future inflation trajectory would remain sensitive to international energy prices, food supplies and base effects, despite a moderation in headline inflation to 10.3 percent in September from 11.1 percent in August.

The Finance Division noted that higher international commodity prices were transmitting inflationary pressures to Pakistan through the energy import bill, transport, production and distribution costs.

Brent crude averaged USD116.8 per barrel in September, up 28.4 percent from August, while natural gas prices also increased. The Food and Agriculture Organisation’s Food Price Index rose 1.5 percent to 136 points, while higher palm oil and fertiliser prices added to import costs and agricultural input expenses.

According to the report, headline CPI inflation averaged 10.2 percent during July-September fiscal year 2027, against 4.3 percent in the corresponding period last year. Transport prices surged 27.4 percent year-on-year in September, while housing, water, electricity, gas and fuel prices increased 12.4 percent. Perishable food prices rose 11.8 percent, while non-perishable food prices increased 7.6 percent, underscoring the continuing pressure on household purchasing power.

The report, however, said improved domestic crop supplies could help ease food inflation, while stronger foreign exchange reserves and diversified financing sources had enhanced the country’s capacity to absorb external shocks.

Pakistan’s economic recovery is expected to draw support from improved agricultural output, selected manufacturing industries, domestic construction activity, remittances and services exports.

The revised national accounts placed fiscal year 2026 economic growth at 3.65 percent, slightly below the earlier estimate of 3.70 percent. Agriculture grew by 3.50 percent, while industry and services expanded by 3.34 percent and 3.81 percent, respectively.

The Finance Division said early indicators suggested that growth momentum would continue into fiscal year 2027, although the outlook remained contingent on evolving global economic conditions.

Agricultural performance could provide some relief to food prices, with provisional maize production estimated at 9.98 million tonnes, up 12.1 percent, and sugarcane output at 97.3 million tonnes, an increase of 8.8 percent. Rice production was projected at 10.2 million tonnes, up 1.8 percent. However, cotton production declined 4.8 percent to 6.71 million bales, highlighting uneven agricultural performance.

Large-scale manufacturing grew by 1.9 percent during July-August fiscal year 2027, compared with 4.8 percent in the same period last year. In August, output increased 0.7 percent year-on-year but fell 5 percent month-on-month.

On the external front, the current account deficit widened to USD874 million during July-September fiscal year 2027, compared with USD755 million in the corresponding period last year, as imports rose faster than exports. Goods imports increased 14.3 percent to USD17.8 billion, while exports grew 7.7 percent to USD8.5 billion, while workers’ remittances rose 14 percent to USD10.9 billion. Private-sector credit recorded at (-) Rs 5.73 billion between July 1 and October 16, compared with (-) Rs 21.07 billion during the same period last year.

Net federal revenue amounted to Rs. 2,912.9 billion, exceeding federal expenditure of Rs. 2,124.4 billion and contributing to a federal fiscal surplus equivalent to 0.5 percent of GDP. FBR tax collection registered a growth of 3.6 percent during the period.

Total expenditure increased by 20.7 percent, driven primarily by a 69.5 percent surge in development expenditure, outpacing the 14.7 percent growth in current expenditure. The increase in current expenditure was largely attributable to an 8.1 percent decline in non-interest expenditure, mainly reflecting a sharp 90.0 percent reduction in subsidies.

In contrast, mark-up payments increased by 36.6 percent. The overall fiscal surplus narrowed to 0.8 percent of GDP (Rs. 1,197.9 billion), compared with 1.7 percent of GDP (Rs. 2,123.8 billion) in the corresponding period of the previous fiscal year. Similarly, the primary surplus declined to 1.6 percent of GDP (Rs. 2,311.2 billion), from 2.3 percent of GDP (Rs. 2,938.9 billion) recorded in the same period last year.

During Jul-Sep FY2027, FBR tax collection grew by 7.0 percent to reach Rs. 3,086.2 billion, exceeding the target by Rs. 33.2 billion. Both direct and indirect taxes posted positive growth, increasing by 5.5 percent and 8.3 percent, respectively. Within indirect taxes, sales tax recorded the strongest growth at 11.6 percent, followed by federal excise duty at 3.6 percent and customs duties at 0.5 percent.

The quarter’s significant development was stronger foreign inflows and improved access to international capital markets. Pakistan’s successful USD3.0 billion sovereign Eurobond issuance in September was central to this improvement, diversifying financing sources and demonstrating international investor participation in the country’s financing program.

Portfolio investment consequently recorded net inflows of USD2.9 billion, compared with net outflows of USD633.3 million a year earlier. Foreign direct investment also increased by about 20 percent to USD720 million, providing further support to the financial account.

Together, these developments helped deliver an overall balance of payments surplus of USD3.1 billion, compared with a deficit of USD274 million in the corresponding quarter last year. By October 16, SBP liquid reserves stood at USD21.5 billion and total liquid reserves at USD26.8 billion.

The stronger reserve position and broader financing access enhance Pakistan’s capacity to meet external obligations and sustain economic activity despite fluctuations in global energy prices.

Broad money (M2) contracted by 3.9 percent between July 1 and October 16, 2026, compared with a 2.5 percent contraction in the corresponding period last year. Net domestic assets declined by Rs. 2,360.3 billion, more than offsetting the Rs. 537.5 billion increase in net foreign assets. The main domestic counterpart was net retirement of government borrowing for budgetary support of Rs. 2,571.8 billion, compared with Rs. 1,822.9 billion a year earlier. Of the current retirement, Rs. 1,873.9 billion was from scheduled banks and Rs. 697.9 billion from the SBP.

The decline in bank financing is consistent with fiscal surpluses and availability of external financing. Private sector credit recorded a net borrowing of Rs. 5.7 billion through October 16, compared with net retirement of Rs. 21.1 billion a year earlier. The outstanding credit stock nevertheless remained about 15.0 percent above its corresponding level last year. Looking ahead, private sector credit demand is expected to further increase following the arrival of cash crops in the market, driven by seasonal financing needs and increased economic activity.

The Monetary Policy Committee increased the policy rate by 50 basis points to 12.0 percent, effective October 27, 2026, to address rising inflationary risks stemming from the intensifying Middle-East conflict and persistently high global energy prices.

The decision aims to anchor inflation expectations, contain second-round effects, and keep inflation within the target range while preserving macroeconomic stability and supporting sustainable economic growth. Equity markets remained sensitive to geopolitical developments and oil prices.

The KSE-100 Index fell 7,006 points in September to close at 169,969 and market capitalization declined by Rs. 903 billion to Rs. 18,928 billion, as higher energy costs weighed on earnings expectations and on the outlook for inflation and interest rates. Interest-Free Financing and Targeted Social Assistance Support Livelihoods.

In September 2026, the Bureau of Emigration and Overseas Employment registered 43,062 Pakistani workers for overseas employment, supporting access to international labour markets and the future remittance base.

During the same month, the Pakistan Poverty Alleviation Fund, working with 24 partner organizations, disbursed 5,782 interest free loans worth Rs. 430 million to support self-employment and livelihoods. Cumulative disbursements since 2019 reached Rs. 127.48 billion. Meanwhile, during Jul-Aug FY2027, Rs. 72.0 million was spent under the Benazir Income Support Programme, reaffirming the Government’s commitment to providing targeted social assistance and strengthening the social safety net for vulnerable households.

The report said continued progress in tax administration, energy efficiency and state-owned enterprise reforms would be essential to sustaining economic expansion and containing pressures on the external account.

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