The Half Year Report released by the State Bank of Pakistan covers the State of Pakistan’s Economy from July to December 2025 (H1-FY26). The report sits at an uncomfortable juncture: it does account for the genuine improvements in the macroeconomic indicators through the first half of the fiscal year, but it also flags that the Middle East war that began on 28 February 2026 does pose significant risk to everything outlined in the report.
1. Industrial recovery drove growth, but it is narrow
Real GDP grew 3.8 per cent in H1-FY26, nearly double the 1.9 per cent recorded a year earlier. Industry led with 8.1 per cent growth, followed by services at 3.1 per cent and agriculture at 2.2 per cent. Large-scale manufacturing (LSM) expanded 4.8 per cent after three consecutive years of contraction, with automobiles, textiles, and petroleum products as the main contributors. Agriculture's gains were almost entirely a livestock story, as the 2025 floods hit cotton and maize hard. The report reads, in retrospect, as a pre-war snapshot: National Assembly briefings have since estimated the conflict's annual cost to Pakistan at between USD 10 and 68 billion depending on severity.
2. Inflation eased into the target band, then the oil shock arrived
National Consumer Price Index based average inflation for H1-FY26 stood at 5.2 per cent and decreased by two percentage points compared to corresponding period of FY25. The same is near the lower end of the medium term target band of 5 to 7 per cent. Monetary Policy Committee in December 2025 reduced the policy rate by 50 basis points which brought the cumulative reduction since June 2024 to 1,150 basis points. Core inflation stayed elevated, however, driven by house rents, gold, education fees, and wage adjustments. The report already flags that war-driven energy prices were transmitting into domestic inflation even as the government tried to absorb the initial increase. Petrol prices have since risen over 42 per cent and diesel nearly 55 per cent, directly reversing what this chapter records.
3. A historic fiscal surplus, built on falling debt servicing
The fiscal balance posted a surplus in H1-FY26, the first half-year surplus since FY02, driven primarily by a sharp fall in markup payments as interest rates declined. Federal Board of Revenue (FBR) tax collection underperformed against its targets despite new mobilisation measures, and a substantial share of non-tax revenue came from SBP profit transfers that may not recur at the same scale. Public debt accumulation slowed to 1.1 per cent from 3.9 per cent a year earlier. The surplus is real, but it rests more on the rate cycle and one-off transfers than on a structurally broader revenue base.
4. The trade deficit widened sharply even as tariffs were rationalised
Pakistan's trade deficit grew by nearly 36 per cent in H1-FY26. Imports rose across almost every category as the National Tariff Policy 2025-2030 rationalisation reduced input costs and stimulated industrial demand. Exports fell, led by a collapse in rice shipments. The tariff reform worked as intended for industry, but simultaneously widened the import bill. With Pakistan's weekly oil import costs reportedly surging from around USD 300 million to USD 800 million since the conflict began, the import sensitivity this chapter documents has moved from a structural concern to an immediate one.
5. Remittances became the load-bearing wall, which is also the exposure
Despite the widening trade deficit, SBP's foreign exchange (FX) reserves rose to USD 16.1 billion by end-December 2025, supported by USD 4.1 billion in net SBP purchases. Workers' remittances reached USD 19.7 billion for the half year, a record, and now finance the bulk of Pakistan's combined trade and primary income deficits. Approximately 55 per cent of these inflows come from Gulf Cooperation Council (GCC) economies. Analysts have flagged that a prolonged conflict affecting Gulf labour markets could slow this inflow precisely when Pakistan's external account depends on it most.
6. Stabilisation without structural reform is not a growth strategy
The most important passage in the report may be the one that receives the least attention. While recording improvements across all major indicators, SBP states explicitly that Pakistan's transition to a sustainable high-growth path requires deep-rooted reforms to address what it calls "chronic structural weaknesses": low savings and investment, weak competitiveness, a falling export-to-GDP ratio, subdued foreign direct investment, and a persistently low tax-to-GDP ratio. Placing this at the centre of a report that otherwise reads as a stabilisation success story signals that the institution does not regard the current numbers as the destination.
To conclude, H1-FY26 produced the strongest half-year macroeconomic performance Pakistan has recorded in several years. The SBP report documents this and immediately qualifies it on two counts: the gains rest on rate compression and favourable commodity prices rather than reformed fundamentals, and the Middle East war has already begun to erode the conditions that made H1 possible. The report may be remembered less as a recovery story and more as an account of how far Pakistan came before the ground shifted again.
