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CWA # 2191, 30 June 2026
PR Review
Pakistan’s Economy in the Second Quarter: 

  Dhivya KM 
Dhivya K M is an intern at NIAS and is also a postgraduate student of MA Financial Economics at the Madras School of Economics, Chennai.

On 12 May 2026, the State Bank of Pakistan (SBP) issued the Half Year Report 2025-26, which reflects the economy of Pakistan during the first half of fiscal year 2026 (July-December 2025). The period saw improved growth, lower inflation rates, and improved public finance situation. The country recorded a fiscal surplus for the first time in the first half of the financial year since 2002, wherein inflation was within the inflation target range of the State Bank of Pakistan. Further the economy grew in the first half with growth being almost double of what was recorded a year ago.

The following are five key takeaways from the report.

1. GDP growth picked up in Q2-FY26 leading to a broad recovery in industry sector
In the second quarter, the economy continued to make progress and first half of GDP growth reached 3.8 per cent, about double the rate of growth registered a year ago. Industry was the leading contributor to growth with substantial increases in production from automobiles, textiles and petroleum products. Services were stable, driven by trade and transport. Meanwhile agricultural output was up due to higher production of livestock, sugarcane, and rice despite some losses experienced during this time.

2. SBP cuts interest rates but signals fewer reductions ahead
The SBP kept the policy rate unchanged for most of the quarter, wary of flood-related supply shocks and swings in global commodity prices. As these risks eased and inflation fell more than expected, the central bank reduced the policy rate by 50 basis points in December to 10.5 per cent, continuing the easing cycle that began in mid-2024.  However, the SBP cautioned that inflation could rise above its target range later in 2026 as energy prices climb and global trade conditions stay unsettled, suggesting that there may be limited scope for further rate cuts.

3. Inflation stayed within the SBP’s target range, but underlying price pressures are increasing 
Inflation averaged 5.2 per cent in the first half of FY26, staying within the SBP’s target band. However, prices began to pick up, driven by flood-related food shortages and new energy taxes, although global oil prices helped take some of the edge off. The SBP also noted that the core inflation stayed high and was pushed up by rising rents, gold prices, school fees, and wages trends that are harder to bring down. Such continuing price pressures are likely to weigh on monetary policy decisions in the next quarter.

4. Private sector borrowing picked up in Q2-FY26, while broad money growth surged to 18.8 per cent
The borrowing of private sector seemed subdued for the half-year due to higher base last year rather than weak demand. Businesses still borrowed PKR 867.2 billion, wherein majority of the borrowing took place in the second quarter, particularly in December. Meanwhile, the broad money supply grew by 18.8 per cent, driven by higher government borrowing, increased currency in circulation, and strong remittance inflows. The SBP also leaned heavily on open market operations to reduce excess liquidity.

5. Pakistan recorded its first half-year fiscal surplus since 2002, but a wider trade gap poses a greater risk
Pakistan achieved its first fiscal surplus in six months of the financial year since 2002 because of its high non-tax receipts and the transfer of profits from the SBP. The government also continued to borrow from commercial banks while restructuring its debt to reduce financing costs. . The foreign exchange reserves increased to USD 16.1 billion by December, due to the high remittances received and the support of the IMF. However, Pakistan’s trade deficit widened due to increased import of machines, metals and vehicles driven by heightened demand.

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