Dr. Ikramul Haq & Abdul Rauf Shakoori
Pakistan’s economic strategy at the start of the current fiscal year [2025-26] reflected a cautious and intentional attempt to balance recovery with stability by directing deep rooted structural challenges. Resultantly, economy while showing resilience over the past year, the strategic emphasis on stability, fiscal consolidation, and selective growth, has started yielding visible positive outcomes despite a challenging global and domestic backdrop.
The focusses on strengthening national defence capability through indigenous production and export-oriented defence manufacturing has emerged as a significant pillar of economic and strategic confidence. The Pakistan military establishment has played a critical role in supporting defence exports, industrial coordination, and institutional continuity, which has indirectly contributed to confidence in national capacity and long-term stability.
The political leadership, however, must demonstrate greater maturity by prioritizing political stability, improving governance, maintaining fiscal discipline, and building durable strategic relationships within the international community. The Pakistan experience repeatedly shows that economic gains cannot be sustained without political cohesion, credible policymaking, and collective ownership of reform agendas across party lines.
The Pakistan economy during the first half of the ongoing financial year (FY) has delivered mixed results, reflecting both underlying growth momentum and unresolved vulnerabilities. The Pakistan Bureau of Statistics reported that during the first quarter of FY 2026 economic growth augmented to 3.71%, signaling a recovery that is increasingly broad based rather than limited to isolated sectors.
The industrial sector emerged as the primary growth driver by expanding 9.38% as manufacturing activity improved and business confidence gradually returned. The agricultural sector continued to act as a stabilizing force by growing 2.89%, while the services sector posted growth of 2.35%, collectively anchoring the overall growth outcome.
The industrial recovery is further corroborated by Large Scale Manufacturing data showing a 5.02% expansion during the first quarter of FY 2026. The manufacturing base recorded growth across sixteen industrial sectors, including textiles and wearing apparel, food processing, nonmetallic mineral products, petroleum products, and automobiles, indicating a broad-based revival rather than a narrow rebound.
The fiscal performance has, however, remained relatively timid compared to past cycles, supported by improved revenue effort and controlled expenditures. The economy achieved its highest ever primary surplus in the last financial year amounting to Rs. 2.7 trillion or 2.4% of GDP, marking a significant milestone in fiscal management.
The fiscal discipline extended into the current year as the first quarter posted a primary balance of Rs. 3.4 trillion at the national level, alongside a positive budget balance of Rs. 2.1 trillion. The achievement on the primary balance front reflects sustained coordination between federal and provincial governments, though the durability of this trend remains dependent on revenue performance and expenditure control.
The external sector presents a more fragile picture despite recent gains. The current account surplus of US$ 2.1 billion in the last financial year represented the first surplus in fourteen years, largely driven by strong workers remittances. The balance of payments benefited from these inflows, easing external pressures and supporting reserve stability. The external position, however, weakened during the first five months of FY 2026 as the current account shifted to a deficit of US$ 812 million compared to a surplus of US$ 503 million in the same period last year.
The Pakistan outlook from the International Monetary Fund suggests that the current account is expected to slip into a modest deficit during FY 2026, although the deficit is projected to remain broadly manageable. The import bill is expected to rise due to flood related agricultural shortfalls and tariff reductions under the National Tariff Policy, however, remittance inflows are projected to remain resilient and continue playing a critical cushioning role.
The revenue collection challenge remains one of the most persistent constraints on macroeconomic stability. The Federal Board of Revenue (FBR) collected Rs. 6.159 trillion during July to December FY 2026 by blocking refunds and taking advances not due, yet falling short of the half year’s revised target of Rs. 6.490 trillion by Rs. 331 billion. The revenue shortfall was largely driven by weaker sales tax performance and failure to broaden income tax base.
Income tax collection reached Rs. 3.26 trillion, reflecting nine percent growth over last year but still missing the target by Rs. 161 billion. Sales tax receipts stood at Rs. 2.086 trillion, falling short of projections by Rs. 172 billion despite ten percent year on year growth. Customs duties amounted to Rs. 642 billion, marginally below the target of Rs. 654 billion. Federal Excise Duty emerged as a relative bright spot by collecting Rs. 400 billion, exceeding the target of Rs. 391 billion and registering sixteen percent growth over last year.
The government under the ongoing IMF programme has committed to contingency measures to safeguard fiscal targets in case of revenue shortfalls. Pakistan authorities have agreed to increase excise taxes on fertilizers and pesticides by five percent, introduce excise duties on high value sugary items, and broaden the sales tax base by shifting selected items to the standard rate if required. The fiscal framework also includes a commitment to offset revenue losses arising from the National Tariff Policy through expenditure postponement until the final quarter of FY 2026.
The banking sector has pushed back against simplistic regional comparisons regarding lending behaviour. Pakistan Banks Association clarified that media reports citing an advance to deposit ratio of 35% relied on outdated data from June 2025. The Pakistan banking sector recorded a rise in the advance to deposit ratio to approximately 38% by November 2025, supported by a Rs. 1.5 trillion injection into private sector credit during the current fiscal year.
The banking structure differs fundamentally from regional peers as the government relies on commercial banks for nearly 99.8% of deficit financing. The informal economy further distorts comparisons as currency in circulation reached approximately Rs. 11 trillion by November 2025, equivalent to around 34% of GDP. The scheduled banks held Rs. 35.38 trillion in total deposits during the same period, whereas cash outside the system represented nearly 31% of that deposit base.
The banking sector, however, expanded credit to priority segments, with the SME borrower base rising 57% year on year to 276,578 and outstanding financing increasing 41% to Rs. 691 billion. The agricultural financing also recoiled as the borrower base increased to nearly 2.9 million supported by record disbursements of Rs. 2.58 trillion. The digital banking transformation accelerated as app-based transactions rose from 2.8 billion in FY 2023 to 6.2 billion in FY 2025 and Raast transactions increased from 147 million to nearly 1.3 billion.
The economic direction of the country at mid-year highlights the importance of sustained reform, political maturity, and institutional coordination. The leadership must now consolidate gains by strengthening governance, improving voluntary tax compliance, formalizing the economy, and building strategic credibility with international partners. Our experience confirms that economic recovery is achievable, but only political stability and disciplined policymaking can convert short term momentum into durable prosperity.
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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 Broad, Flat, Low-rate, and Predictable Taxes (third edition, 2024), 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 ensure 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): Abdul 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