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ISLAMABAD: Pakistan said in its economic outlook on Monday recent floods could push food prices higher in the weeks ahead but inflation was expected to stay below 4.5 percent this month, underscoring a broadly stable economic outlook despite severe weather shocks.

The finance ministry’s September economic outlook said flood-related supply chain disruptions may cause a temporary rise in prices, which eased to 3 percent in August, the lowest in more than three years, but forecast that inflation will remain contained between 3.5 and 4.5 percent in September 2025.

The report said the broader economy had continued to stabilize in the first two months of the fiscal year, with large-scale manufacturing rebounding, fiscal balances improving and investor confidence staying firm despite widespread flood damage.

Pakistan is currently in the first year of a $7 billion Extended Fund Facility (EFF) approved by the International Monetary Fund in September 2024, a program that has helped restore investor confidence, stabilize foreign exchange reserves and support a recovery in growth after years of balance-of-payments pressures.

Fiscal discipline has also improved, with the primary surplus rising to a 24-year high and the fiscal deficit narrowing to its lowest in eight years, while inflation has slowed and the rupee has stabilized. The government is seeking to build on these gains even as it grapples with the economic fallout of this year’s floods.

“Flood-related disruptions may exert pressure on food supply chains, leading to an uptick in prices. As a result, inflation is expected to rise temporarily but remain contained within the 3.5–4.5 percent range in September 2025,” the Ministry of Finance said in its Monthly Economic Update & Outlook.

“Although flood-induced disruptions pose temporary risks to inflation, the overall outlook signals a stable macroeconomic environment, with supportive trends in industry, external inflows, and fiscal management expected to underpin sustainable growth going forward,” the document added.

The ministry said Pakistan’s economy “maintained its trajectory of stabilization and growth” in the first two months of FY2026, supported by moderating inflation, a rebound in large-scale manufacturing (LSM) and continued fiscal consolidation.

The LSM sector grew 9.0 percent year-on-year in July 2025, with 16 of 22 sub-sectors recording positive growth. Automobile output surged — car production jumped 100.9 percent, trucks and buses 69.5 percent, and jeeps and pickups 50.1 percent — while cement dispatches climbed 20.9 percent to 7.847 million tons, including a 51.3 percent surge in exports.

Despite severe losses to crops and livestock, agricultural credit disbursement rose 19.5 percent to Rs404.2 billion ($1.45 billion) in July-August. Imports of agricultural machinery increased 66.7 percent to $29.4 million, while fertilizer offtake also rose compared to last year.

MACROCONOMIC POSITION

Pakistan’s fiscal accounts showed further improvement, with the primary surplus rising to Rs228.9 billion ($814 million), or 0.2 percent of GDP, in July, up from Rs107.1 billion ($381 million), or 0.1 percent of GDP, a year earlier — the highest in 24 years. Net federal revenues grew 7.7 percent to Rs440 billion ($1.56 billion), supported by a 14.8 percent increase in tax revenues and a 23.9 percent rise in non-tax receipts, including petroleum levies, dividends, and defense income.

Overall, the fiscal deficit was contained at 0.2 percent of GDP, and the government reiterated its commitment to “further improve the fiscal performance in FY2026 through effective resource mobilization and a prudent expenditure management strategy.”

The current account deficit widened to $624 million in July-August from $430 million a year earlier as imports rose 8.8 percent to $10.4 billion. However, exports increased 10.2 percent to $5.3 billion, led by knitwear (16.9 percent), garments (10.6 percent), and bedwear (12.0 percent).

Remittances rose 7.0 percent year-on-year to $6.4 billion, with inflows from �������� and the United Arab Emirates accounting for nearly half.

Net FDI inflows stood at $364.3 million, driven by investment in power ($156.9 million) and financial services ($110.2 million), while foreign exchange reserves reached $19.8 billion as of September 19, including $14.4 billion held by the State Bank of Pakistan.

The central bank kept the policy rate unchanged at 11 percent on September 15, citing moderate inflation and improving indicators but warning of uncertainty from flood impacts. Broad money supply contracted by 2.3 percent during the first two months of FY2026, while budgetary borrowing was sharply reduced.

Investor confidence remained strong, with the benchmark KSE-100 Index climbing 9,227 points in August to close at 148,617. Market capitalization surged by Rs952 billion ($3.38 billion) to Rs17.65 trillion ($62.7 billion).

Looking ahead, the ministry said remittances and exports “continue to provide strong support” to the external account, while easing global commodity prices could help reduce the import bill.

It added that economic activity “has remained broadly stable” despite the floods, with strengthening industrial momentum and a manageable current account deficit expected in the months ahead.