Dr. Ikramul Haq & Abdul Rauf Shakoori
The current economic situation of Pakistan reflects a nation shaping stability in the face of external and internal shocks while remaining anchored to 37-month US$7 billion Extended Fund Facility (EFF) programme of International Monetary Fund (IMF). The second round of review discussions with IMF coincided with Pakistan’s release of its September 2025 Economic Update and Outlook, which provides a snapshot of stabilization, cautious optimism, and continued challenges.
The IMF team focused on fiscal reforms, anti-money laundering efforts, and resource distribution through the National Finance Commission, though the government presented improving indicators on inflation, fiscal balance, manufacturing activity, and financial markets. The report highlights that despite severe floods since July 2025, the macroeconomic route is broadly stable, inflation has moderated sharply, large-scale manufacturing (LSM) has rebounded, and fiscal accounts show consolidation. The narrative is one of tentative stability but also emphasizes the fragility that requires structural governance reforms to translate into sustainable growth.
The economic update highlights that Pakistan’s economy maintained a positive direction of macroeconomic adjustment during the initial months of the ongoing fiscal year (FY) 2026. The inflationary environment softened, with consumer price inflation falling to 3.0 percent year-on-year in August 2025 compared to 9.6 percent in the same month last year. The two-month average stood at 3.5 percent against 10.4 percent last year, emphasizing the impact of prudent monetary management and favorable base effects. The fiscal deficit was limited to 0.2% of GDP, and the primary surplus increased to Rs. 228.9 billion, equivalent to 0.2 percent of GDP, marking an eight-year low in fiscal deficit and a 24-year high primary surplus.
The government attributed this to prudent expenditure control and stronger revenue mobilization, with Federal Board of Revenue (FBR) collections rising by 14.1 percent to Rs. 1,661.5 billion in Jul-Aug FY2026 and non-tax revenues surging 23.9 percent, led by petroleum levies and dividends.
The agricultural sector, however, faced immediate stress due to floods, with crop assessments ongoing. The government declared climate and agricultural emergencies nationwide. Yet, there were encouraging signs in agricultural financing and input. Agricultural credit disbursement jumped 19.5 percent to Rs. 404.2 billion in Jul-Aug FY2026, compared to Rs. 338.2 billion last year. The imports of agricultural machinery and implements rose 66.7 percent to $29.4 million, indicating investment in mechanization despite climatic stress.
Similarly, fertilizer inputs remained strong, with urea offtake at 2,676 thousand tonnes, 12.4 percent higher than Kharif 2024, and DAP offtake at 552 thousand tonnes, 8.7 percent higher than last year. These figures highlight resilience within agriculture financing and input supply, though the full impact of the floods on Kharif yields will be decisive in the months ahead.
The LSM sector demonstrated a marked recovery, registering 9.0 percent year-on-year growth in July 2025 and 2.6 percent every month. Sixteen of the twenty-two sectors recorded growth, with textiles, wearing apparel, petroleum products, non-metallic minerals, and pharmaceuticals leading.
The automobile sector showed dramatic expansion: car production rose 100.9 percent, trucks and buses 69.5 percent, and jeeps and pickups 50.1 percent during Jul-Aug FY2026. Cement dispatches totaled 7.847 million tonnes, up 20.9 percent year-on-year, with domestic dispatches rising 14.2 percent to 6.090 million tonnes and exports surging 51.3 percent to 1.757 million tonnes. These trends highlight growing industrial momentum, marking a reversal from recent contractionary phases.
The moderation in inflation is significant. CPI inflation fell to 3.0 percent in August from 4.1 percent in July and 9.6 percent last year. Similarly, monthly inflation decreased by 0.6 percent in August, reversing the 2.9 percent increase in July. The decline in perishable food prices by 21.6% provided significant relief, though education (10.9%), health (10.6%), and clothing and footwear (8.1%) remained key drivers.
The Sensitive Price Index for the week ending September 25 declined by 0.16%, with prices of 17 items rising, 11 decreasing, and 23 stable. Inflation is projected to remain contained within 3.5–4.5% in September despite flood-related disruptions.
The external sector remained under manageable pressure. The current account posted a $624 million deficit in Jul-Aug FY2026, widening from $430 million last year, driven by a 10.2% rise in exports to $5.3 billion against an 8.8% increase in imports to $10.4 billion.
The trade deficit widened modestly to $5.1 billion. Key export gains were observed in knitwear (16.9%), garments (10.6%), and bedwear (12.0%). IT exports surged 18.3% to $691.7 million, a significant boost for services. The imports of petroleum products rose 17.8% and palm oil 29.1%, while crude imports fell 6.1%.
The Remittances grew 7.0% to $6.4 billion, led by Saudi Arabia (24.6% share) and the UAE (20.6%). The Net FDI inflows were $364.3 million, mainly from China ($120 million) and Hong Kong ($60 million), with power and financial services attracting the most investment. However, portfolio investments recorded net outflows, signaling investor caution.
Foreign exchange reserves reached $19.8 billion on September 19, 2025, including $14.4 billion with the State Bank, reflecting stability compared to recent years.
The monetary and financial sector also showed signs of easing conditions. The State Bank maintained the policy rate at 11 percent in September, citing moderate inflation and improving indicators, but caution due to flood uncertainty. Money supply (M2) contracted by 2.3% during Jul-Aug, compared to 2.5% last year.
Net foreign assets rose by Rs. 34.6 billion, while net domestic assets fell by Rs. 990 billion. Government budgetary borrowing was retired by Rs. 2,328.2 billion, reversing net borrowing of Rs. 733.3 billion last year; however, the private sector retired Rs. 214.8 billion.
The Pakistan Stock Exchange maintained bullish momentum, with the KSE-100 Index gaining 9,227 points in August to close at 148,617. Market capitalization rose from Rs. 952 billion to Rs. 17,655 billion. As of September 26, the KSE index stood at 162,257, nearly doubling from the previous year, while market capitalization expanded 77.7 percent year-on-year to Rs. 19.04 trillion.
The human development and social protection front showed parallel activity. Emigration slowed, with 51,444 workers registered in August, down 18.7 percent from July. However, human development initiatives expanded, with the Pakistan Poverty Alleviation Fund disbursing 17,583 interest-free loans worth Rs. 899 million in August. Since 2019, Rs. 120.3 billion has been provided.
The Benazir Income Support Programme and Benazir Bhutto Shaheed Human Resource Research & Development Board signed an MoU to train 3,000 beneficiaries in market-relevant trades, aiming to enhance employability and create sustainable livelihoods.
The global economic environment provides both opportunities and risks. Fitch Ratings projected global growth of 2.4 percent for 2025 and 2.3 percent for 2026, with global activity accelerating in August to its fastest pace in 14 months.
Emerging markets are catching up with developed economies, while the J.P. Morgan Composite PMI Output Index rose to 52.9 in August. U.S. growth is projected at 1.6 percent, China at 4.7 percent, and the Eurozone at 1.1 percent.
Global consumer price inflation remains elevated at just under 4 percent, while commodity prices are mixed, with energy falling 3.9 percent, food easing, but precious metals and fertilizers rising. Pakistan’s key export markets, including the U.S., UK, China, and Eurozone, are moving around or above long-term potential, indicating demand for Pakistani products.
The critical analysis of this outlook suggests cautious optimism but highlights enduring vulnerabilities. Macroeconomic stability is impressive given flood disruptions, but the structural flaws in the fiscal system, limited export base, and heavy dependence on remittances persist.
The modest FDI inflows remain insufficient compared to Pakistan’s financing needs; however, portfolio outflows indicate lingering investor skepticism. The agriculture sector’s resilience in credit and inputs is positive, but climate risks underline the urgency of long-term adaptation.
The LSM rebound is promising, but sustaining growth will require continuous energy availability, policy consistency, and export competitiveness. The moderation in inflation is encouraging, yet it reflects base effects and food supply volatility, leaving inflation susceptible to shocks.
The way forward for Pakistan lies in consolidating fiscal gains through structural tax reforms, broadening the revenue base, and reducing leakages. The government must leverage the Special Investment Facilitation Council to attract long-term foreign direct investment by simplifying regulations, guaranteeing contract enforcement, and offering sector-specific incentives in IT, renewable energy, and infrastructure.
The export base must be diversified beyond textiles, with value-added sectors incentivized. Agricultural resilience requires investment in climate-smart technologies and water management. Social protection initiatives must be scaled to offset shocks and safeguard human capital.
The governance reforms, particularly in fiscal management, remain critical to unlock external financing and investor trust. By aligning prudent macroeconomic management with structural reforms and investor-friendly policies, Pakistan can translate current stability into sustained, inclusive growth, ensuring stability against shocks and a stronger position in the global economy.
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Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, environment, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He holds LLD in tax laws with specialization in transfer pricing.
He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996. He established Huzaima & Ikram in 1996 and is presently its chief partner. He studied journalism, English literature and law.
He is Chief Editor of Taxation. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).
He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition, Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).
He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal).
He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 3000 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.
X (formerly Twitter): DrIkramulHaq
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Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).
Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to insure knowledge transfer.
His notable publications are: Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan and Rauf’s Research on Labour Laws and Income Tax and others.
His articles include: Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge, Countering corrupt practices .
X (formerly Twitter): Adbul Rauf Shakoori
The recent publication, coauthored by these writes with Huzaima Bukhari is
Pakistan Tackling FATF: Challenges & Solutions, available at:
https://aacp.com.pk/book-detail/pakistan-tackling-fatf-challenges-and-solutions-35
https://www.amazon.com/dp/B08RXH8W46