Assessing Inflationary Risks and Opportunities in Pakistan's 2025-26 Fiscal Outlook

Pakistan's economic trajectory in 2025-26 is marked by a fragile but discernible stabilization. After years of inflation peaking at 38% in 2023, the country has entered a phase of moderation, with headline inflation projected to hover between 3.5% and 4.5% for the current fiscal year. This decline reflects the combined impact of fiscal consolidation, monetary easing, and structural reforms under the IMF-supported program. Yet, the path ahead remains uneven, with risks and opportunities coexisting in sectors poised to withstand cyclical pressures while capitalizing on policy-driven momentum.

The Inflationary Baseline: A Tale of Two Phases

Pakistan's inflationary journey has been dramatic. From the 38% peak in May 2023, driven by subsidy removal and external shocks, the economy has seen a sharp correction. By June 2025, headline inflation had fallen to 3.2%, with the State Bank of Pakistan (SBP) attributing this to tighter monetary policy (a 1,000-basis-point rate cut since June 2024), fiscal discipline, and falling global commodity prices. The Finance Ministry now projects inflation to remain within 3.5–4.5% for FY2026, a range that, while modest, masks underlying vulnerabilities.

Key drivers of this moderation include a 10.6% year-on-year drop in perishable food prices and a 3.3% decline in energy costs. However, upward pressures persist in non-tradable sectors such as education (10.1%) and healthcare (12.2%), reflecting structural bottlenecks. Meanwhile, external buffers—bolstered by a 28.8% surge in remittances ($34.9 billion in Jul–May 2025) and a current account surplus—have provided stability, shielding the economy from currency shocks.

Resilient Sectors: Where Structural Reforms Meet Demand

Amid this backdrop, certain sectors have demonstrated resilience to inflationary pressures, driven by policy support and global demand.

1. Information Technology (IT):
   The IT sector has grown by 28% year-on-year in 2025, fueled by digital infrastructure upgrades and the Roshan Digital Account initiative, which attracted $9 billion in inflows. Structural reforms, including tax harmonization and improved digital payment systems, have enhanced its competitiveness. The sector's export-oriented model and low exposure to domestic energy costs make it a natural hedge against inflation.

2. Agriculture:
   Despite a 3.6% rural inflation rate in June 2025, agricultural output is being fortified by the Uraan Pakistan initiative. Targeted investments in seeds, machinery, and irrigation have boosted productivity, while a $20 billion World Bank program aims to modernize supply chains. A bumper Kharif harvest (targeting 10.18 million cotton bales) could further stabilize food prices, insulating the sector from global commodity swings.

3. Renewable Energy:
   Pakistan's solar power boom, supported by the Climate Budget Tagging (CBT) initiative (Rs90.2 billion allocated for clean energy projects), is reducing reliance on imported oil. A carbon levy on petroleum products and international partnerships are accelerating this transition. Energy cost stabilization here directly cushions industrial and household sectors, offering a long-term inflation hedge.

4. Pharmaceuticals and Textiles:
   Export-led strategies have revitalized these sectors. The pharmaceutical industry benefits from a simplified regulatory framework and global demand for generic drugs, while textiles gain from customs duty cuts on industrial inputs and Special Economic Zones (SEZs). Both sectors are leveraging public-private partnerships to enhance value chains, insulating them from domestic inflation.

Monetary Easing and Fiscal Reforms: Catalysts for Growth

The SBP's policy rate, now at 11%, has been a critical tool in managing inflation while supporting liquidity. Rate cuts have reduced borrowing costs, enabling investment in infrastructure and manufacturing. Meanwhile, fiscal reforms—such as a 68.1% surge in non-tax collections and a 25.9% rise in tax collection—have narrowed the fiscal deficit, restoring investor confidence.

The government's focus on broadening the tax base, particularly in under-taxed sectors like agriculture, has improved revenue resilience. Additionally, the IMF's $7 billion program has institutionalized fiscal discipline, with a projected 20% increase in foreign direct investment (FDI) in H1 FY2025.

Risks to the Outlook: Weathering the Storm

While the current trajectory is promising, risks remain. Heavy monsoons in 2025 could disrupt agricultural output, pushing food prices upward. Global commodity price volatility—particularly in oil and wheat—and geopolitical tensions (e.g., Red Sea disruptions) could reignite inflationary pressures. Domestically, proposed hikes in gas tariffs and energy pricing adjustments may temporarily elevate costs.

Strategic Investment Implications

For investors, the key lies in balancing exposure to resilient sectors with hedging against macroeconomic volatility.

• Long-Term Positioning: Prioritize sectors with structural tailwinds, such as IT and renewables, which benefit from global demand and policy support. The Pakistani equities market, up 87% in dollar terms in 2025, reflects this optimism.
• Diversification: Allocate to agriculture and textiles, which combine export potential with domestic demand resilience.
• Monitoring: Closely track SBP policy rate decisions and IMF program milestones. A potential 0.85-percentage-point inflation uptick from gas pricing reforms could test market nerves.

Conclusion: A Delicate Equilibrium

Pakistan's 2025-26 fiscal outlook is a study in contrasts: a subdued inflation environment coexists with structural fragilities. Investors who navigate this landscape by focusing on sectors insulated from cyclical shocks—while staying attuned to policy and external risks—stand to benefit from a rare confluence of stabilization and reform. The challenge, as always, is to distinguish between durable progress and temporary respite. For now, the data suggests that the former is taking root, even as the latter lurks in the shadows.