• Calls for deep structural reforms to achieve higher growth
• Remittances may face pressure in last quarter of FY26

KARACHI: The State Bank of Pakistan (SBP) has projected real GDP growth to remain close to the lower bound of its earlier forecast range of 3.75 to 4.75 per cent for the current fiscal year, while stressing the need for deep-rooted economic reforms to place the country on a higher growth trajectory.

“Specifically, there is a need to address long-standing issues, including low savings and investment, weak competitiveness, falling exports, subdued foreign direct investment, and the persistently low tax-to-GDP ratio,” the central bank said in its first half-yearly report, State of Pakistan’s Economy, issued on Tuesday.

The report noted that a substantial reduction in interest payments and fiscal consolidation had significantly reduced the country’s debt servicing burden. This, alongside steady non-tax revenue, SBP profits and petroleum development levy (PDL) collections, turned the fiscal balance into a surplus in the first half (July-December) of the current fiscal year, while the primary surplus remained at last year’s level.

According to the report, private sector credit grew by 0.9pc year-on-year by the end of December 2025 compared to a 22.8pc increase during the same period last year. In absolute terms, private sector credit expanded by Rs992.3 billion in July-December compared to Rs1.978 trillion a year ago.

The report attributed weak export performance to a host of structural issues, including low productivity, policy inconsistencies, weak integration with global value chains, and lack of product and market diversification. These factors, it said, have made Pakistan’s exports vulnerable to price and demand shocks.

Large-scale manufacturing (LSM) output increased by 4.8pc in July-December after contracting over the previous three years. The recovery was mainly driven by automobiles, textiles and wearing apparel, and coke and petroleum products.

The SBP said that although core inflation had eased compared to last year, it remained sticky at elevated levels. “Persistent pressures stemmed mainly from house rents, gold prices, education fees, and minimum wage adjustments. Moreover, an increase in gross margins of the corporate sector also contributed to core inflation as firms in some sectors increased product prices despite falling input costs,” it added.

On balance, the SBP projected the fiscal deficit to remain within the range of 3.5pc to 4.5pc of GDP. It warned that while the near-term outlook remained broadly stable, lingering impacts of war-related disruptions on supply chains and global economic activity could pose significant challenges to macroeconomic stability over the medium term.

Exports are expected to remain weak due to the possibility of slower global economic growth in the current fiscal year, multi-year low rice prices, closure of Pakistan’s western border, and realignment of global trade flows amid ongoing tariff adjustments.

“Workers’ remittances may also be impacted in Q4-FY26 (fourth quarter of the current fiscal year), considering that remittances from the GCC (Gulf Cooperation Council) countries contributed around 55pc of total remittances between FY21 and FY25,” the report said.

However, the SBP expected remittances to remain strong on a full-year basis, partially offsetting the widening trade deficit. Consequently, the current account deficit for FY26 is projected to remain close to the lower bound of the range of 0pc to 1pc of GDP.

The report warned that slower economic activity in Gulf economies could affect remittance inflows, which have remained instrumental in financing the trade deficit and supporting stability in the foreign exchange market.

It also cautioned that supply chain disruptions, particularly in the import of critical raw materials and machinery, could affect industrial production and exports, while fertiliser shortages may impact crop yields.

“The slowdown in economic activity is likely to have implications for revenue generation. On the other hand, the need for discretionary expenditure may also necessitate additional revenue measures, which may have inflationary consequences,” the report added.

Published in Dawn, May 13th, 2026