Key Takeaways
- Current account deficit narrowed by 34 percent due to remittance inflows.
- Dual-tranche Eurobond issuance strengthens foreign exchange reserves.
- Large scale manufacturing grew by 3.03 percent year-on-year.
Recent data releases indicate a mixed picture of Pakistan's economy, with some positive signs of stabilisation and growth. The current account deficit has narrowed by a whopping 34 percent during the first two months of the current year, reflective of a rise in remittance inflows, which was not projected given the prevailing Middle East conflict.
This rise in remittances is partly attributed to emigrants from other countries leaving the Gulf States due to the war, while Pakistanis continue their presence in the region, coupled with the increased use of official channels to send remittances. However, this situation is not expected to last once the conflict is resolved, and some political pundits project the turmoil to last until the end of the Trump term.
The dual-tranche 3 billion dollars Eurobond issuance has also strengthened the foreign exchange reserves and the current account, with interest rates lower than the domestic borrowing rate. This issuance consists of a 1.75 billion dollars, 5.5-year bond at a 7.5 percent coupon rate, and a 1.25 billion, 10-year bond at a 7.9 percent coupon rate. These bonds are payable in US dollars, while the Pakistani rupee depreciates by an average of 3 percent to 4 percent per year.
Foreign direct investment (FDI) also showed a positive trend, with July-August 2026 FDI rising by 24 percent year-on-year, supported by stronger inflows in August. The monthly economic outlook and update for August gave the July 2025 FDI of 178.6 million dollars against 223.6 million dollars in July 2026, a decline of 45 million dollars. The July-August 2026 figure as per the State Bank of Pakistan was 495 million dollars, giving a total of 316.4 million dollars for August 2026 against 398.6 million dollars for the same period of 2025 (though there is a discrepancy of 34.3 million dollars with the Finance Division figure of 364.3 million dollars).
Large scale manufacturing (LSM) grew by 3.03 percent year-on-year and 9.51 percent month-on-month, an extremely positive feature of the economy as it reflects higher Gross Domestic Product (GDP) growth and new employment opportunities. However, the textile sector has challenged this improvement, claiming that more than 100 units have been closed down due to a massive rise in input costs, which is attributed to administrative measures as part of the International Monetary Fund conditions.
The largest growth sectors were automobiles (57 percent) followed by garments (22 percent). Despite these positive indicators, there is little need for complacency as this amount of FDI is extremely low compared to other regional countries. However, one would hope that the upward trend will continue.
The global economy is suffering from major supply disruptions due to the ongoing Middle East conflict, which has further impacted the economic landscape. While the government's stabilisation efforts have shown some success, challenges remain, particularly in sectors like textiles, which are facing significant input cost increases.
