Three quarters of the financial year of 2025-26 have just come to an end. There is need to assess the performance of the economy during these nine months.
The objective of this article is to highlight first the macroeconomic trends since July 2025 up to February 2026. This is then followed by identification of the types and extent of changes in trends following the commencement of the war in the Middle East.
The economy has demonstrated significant improvement up to now in 2025-26, compared to the outcomes in 2024-25. The first indicator is that of the GDP growth rate. It was 3.1 percent in 2024-25. Already, in the first quarter of 2025-26, the GDP growth rate has risen to 3.7 percent.
Forecasts made by the Planning Commission and international agencies are that the growth rate for the full year of 2025-26 may approach 4 percent. This is based particularly on much better performance of the industrial sector.
The growth rate of the industrial sector was as high as 9.4 percent in the first quarter of 2025-26. The Quantum Index of Manufacturing indicates that the sector has achieved a growth rate of almost 6 percent in the first seven months of 2025-26.
A proxy indicator of the overall rate of economic growth is the rate of increase in the broad-based consumption of POL products across the economy. According to the Oil Companies Advisory Committee (OCAC), this has increased by as much 7.6 percent in the first seven months of 2025-26.
The overall level of investment is also beginning to show recovery from the slump in the last three years. Three indicators are revealing that this is happening. First, bank credit to the private sector in the first eight months of 2025-26 has shown a phenomenal growth of over 85 percent. Second, imports of machinery in the first seven months have increased by almost 13 percent. Third, development spending by the federal and provincial governments has jumped up by almost 25 percent in the first half of 2025-26.
The rate of inflation had come down to only 4.5 percent in 2024-25. Fortunately, it has continued at a single-digit rate in the first eight months of 2025-26. There is evidence of some acceleration in the rate of inflation, while remaining single-digit, from 4.1 percent in July 2025 to 7 percent in February 2026. The core rate of inflation has averaged 7.1 percent up to now in 2025-26.
There is a budgetary surplus of Rs 541 billion in the combined budgets of the federal and the provincial governments in the first half of 2025-26. This has been facilitated by the lumpy transfer by the SBP of profits of Rs 2428 billion. The area of concern is the slow growth rate in FBR revenues of 9.5 percent, as compared to the target growth rate of 18.7 percent.
The balance of payments has remained manageable from July 2025 to February 2026. There has been a small current deficit of USD700 million as compared to the projection of deficit of USD2 billion in the whole of 2025-26. February actually saw a surplus.
The financial account surplus has almost doubled to USD 1,220 million. Combined with the net inflow of IMF credit, reserves have risen to the relatively high level of USD 16,438 million. These reserves provide import cover for 2.8 months.
Therefore, Pakistan is in a better position to manage a negative shock due to the Middle East war. Also, the country has the umbrella of an on-going IMF Programme with loan of USD7.2 billion by the end of 2027. The good news is that the third review of the Programme has concluded successfully.
We turn now to the likely changes in the positive trends highlighted above due to the economic consequences of the on-going war in the Middle East.
There are various scenarios. The most negative scenario is where the war continues, like the Ukraine-Russia War, and there remains a restriction on movement of ships by Iran in the Strait of Hormuz. A more positive scenario is that negotiations start between USA and Iran, leading eventually to a ceasefire and partial opening of the Strait of Hormuz.
We look at the likely outcome in the last quarter of 2025-26 of economic variables in Pakistan in the negative scenario.
The big impact of restricted availability of crude oil and POL products is on the GDP growth rate. Particular sectors of the economy with larger fuel inputs will be impacted relative more. These sectors have been identified from the Sector Input-Output Table of Pakistan, prepared by the PBS.
The transport input is relatively large in sectors like crop production, manufacture of food products and textiles, wholesale and retail trade, education and public administration and defense. The largest input of transport is in education, equivalent to 36 percent of the total national input. Other sectors which are relatively dependent on fuel inputs are manufacture of food products and textiles, with shares respectively of 14 percent and 10 percent.
The lack of access to imported LNG will hit most the fertilizer, cement and textile industries and the power sector. Units in the textile industry use gas for captive power generation. Further, the limited access to crude oil will reduce the output from POL plants in the country.
Based on the identification of the above activities more vulnerable to reduced availability of oil imports, it is estimated that with 10 percent reduction in access to fuel inputs, the loss to the GDP will be close to 2 percent. As such, in this scenario there is likely to be a sharp decline in the GDP growth rate in the fourth quarter of 2025-26 and in subsequent quarters.
The next impact focused on is the rate of inflation. The initial jump in the price of motor spirit and HSD oil is close to 20 percent after the rise in price per liter of Rs 55. This adjustment was linked to a price of Brent crude of USD94 per barrel soon after the start of the war. Earlier, the price had been USD64 per barrel.
The price of crude oil has continued to escalate and is USD112 per barrel currently. Projections are that if the global shortage is large and persistent then the price could rise to USD150 per barrel. This will mean a further escalation in price per liter of over Rs 100 per liter.
There is dual impact of the rise in POL prices. The first is the direct impact on consumption expenditure of households and the second impact is via the rise in transport costs of goods, especially food items. The weight of transport in the CPI is 5.9 percent. As such, the escalation of fuel prices by Rs 55 per liter has added almost 1.2 percentage points directly to the rate of inflation.
The broader impact on prices of a wide range of consumer goods is larger. According to the Input-Output table a 20 percent escalation in fuel prices leads to an increase of almost 4 percentage points in the CPI. Therefore, already the rate of inflation is likely to be higher by 5 percentage points. The rate of inflation prior to the war was 7 percent. Therefore, Pakistan is likely to experience double-digit inflation once again.
Turning to the impact on the external balance of payments, this is likely to include the rise in the import bill, some fall in remittances to Pakistan from the Middle East and some decline in exports, depending upon the extent of loss of competitiveness.
The rise in the monthly fuel import bill has been estimated at the current price of USD112 per barrel of Brent crude. This could add over USD1.0 billion monthly to the imports of petroleum products, crude and LNG.
The remittances may also be negatively impacted. Almost 55 percent of the global remittances by Pakistani workers are from the Middle East, with Saudi Arabia as the largest source. The economies in the Middle East can be characterized still as one-product economics. For example, oil exports by Saudi Arabia are 80 percent of the total exports and exports are 20 percent of the GDP.
Therefore, even a 10 percent decline in the value of exports of oil due to the restrictions in the Strait of Hormuz would reduce the GDP of Saudi Arabia by almost 2 percent, equivalent to USD25 billion. The consequent economic recession could lead to a reduction in labour demand and drop in remittances to Pakistan by our workers in Saudi Arabia. This could also happen in other countries.
A less emphasized negative impact is on exports. Countries will have to focus on how higher prices of POL products impact on their export competitiveness, due particularly to a rise in transport and input costs.
There is need to see what the current POL prices are in countries competing with Pakistan, especially in textile exports, after the recent price adjustments following the commencement of the war. The prices per liter of gasoline and HSD oil in selected countries are given below in Table 1.
