Finance Ministry warns higher oil costs could fuel inflation, weaken purchasing power and widen the import bill despite improving economic activity.

ISLAMABAD: The Ministry of Finance has identified elevated international oil prices as the principal risk to Pakistan’s economic outlook, warning that higher fuel costs could weaken household purchasing power, raise production expenses and widen the import bill.

In its Monthly Economic Outlook for September 2026, the ministry said economic activity was expected to strengthen further in FY2027 as the recovery broadened across agriculture, manufacturing and private-sector credit.

Workers’ remittances, services exports and stronger foreign exchange reserves are expected to support economic stability, while renewed access to international capital markets could improve the country’s capacity to withstand external shocks.

However, inflation is likely to remain elevated in the near term, with headline inflation projected at 10–11 percent in September FY2027. The ministry said its subsequent trajectory would depend largely on global oil prices.

Agriculture and manufacturing support growth

Early indicators point to improving agricultural activity, supported by increased cultivation of major Kharif crops and higher agricultural lending.

Agricultural credit disbursements rose 16.4 percent to Rs271.9 billion in July FY2027 from Rs233.7 billion a year earlier. Urea offtake increased 2.9 percent during April–August, while tractor sales grew 4.7 percent to 2,294 units during July–August.

Large-scale manufacturing output increased 3.03 percent year-on-year in July 2026 and rose 9.5 percent from June. Automobile production surged 57 percent, while wearing apparel and tobacco output increased 22 percent and 35.8 percent, respectively.

Vehicle production and sales grew 27.6 percent and 29.9 percent, respectively, during July–August FY2027.

Cement dispatches increased 2.8 percent to approximately 8.5 million tonnes, as an 8 percent rise in domestic sales offset a 16.7 percent decline in exports.

The ministry said these developments indicated that the recovery was gradually spreading across productive sectors and related services.

Inflation rises to 11.1 percent

Consumer price inflation accelerated to 11.1 percent in August 2026, compared with 9.2 percent in July and 3.1 percent a year earlier.

Monthly inflation remained at 1.2 percent, unchanged from July. The annual increase largely reflected higher energy, transport and food costs, alongside the comparison with falling prices in August 2025.

Food, housing and utilities, and transport collectively contributed around three-quarters of headline inflation. Core inflation stood at 8.8 percent in urban areas and 8.5 percent in rural areas.

International food prices also increased, with the FAO Food Price Index rising 1.9 percent to 133.3 points in August. Although the index remained below its March 2022 peak, higher global prices could add to domestic costs for edible oil and other imported food items.

The ministry said targeted support for vulnerable households and measures to prevent further inflationary pressures remained important policy priorities.

Fiscal consolidation faces higher interest costs

The Federal Board of Revenue collected Rs1.722 trillion in net taxes during July–August FY2027, up 3.7 percent from Rs1.662 trillion in the corresponding period last year.

Sales tax receipts increased 13.8 percent to Rs718.9 billion, while federal excise duty collection rose 2.2 percent to Rs117.9 billion. Direct tax receipts declined 2.9 percent to Rs689.6 billion, while customs revenue fell 4 percent to Rs195.9 billion.

Higher interest payments nevertheless put pressure on public finances. Federal current expenditure reached Rs1.092 trillion in July 2026, compared with Rs761.6 billion a year earlier. Interest payments rose to Rs792.9 billion from Rs490.4 billion.

The consolidated fiscal deficit widened to Rs596.6 billion, equivalent to 0.4 percent of GDP, against Rs261.5 billion, or 0.2 percent of GDP, a year earlier.

Despite the higher deficit, the government maintained a primary surplus of Rs196.3 billion, indicating that revenues continued to cover expenditure excluding interest payments.

Remittances and reserves strengthen external position

Pakistan’s current account deficit narrowed to $543 million in July–August FY2027 from $853 million a year earlier, despite an expanding trade gap.

Goods imports increased 11.4 percent, outpacing 4 percent growth in goods exports. However, workers’ remittances rose 14.7 percent to $7.29 billion, while services exports increased 28.8 percent to $1.81 billion.

Foreign direct and portfolio investment inflows rose 80.2 percent to $562 million. Foreign direct investment increased to $494.5 million, while portfolio investment returned to a net inflow.

The government’s $3 billion Eurobond issuance in September also supported external financing. State Bank of Pakistan liquid reserves reached $21.39 billion on September 18, while total liquid foreign exchange reserves stood at $26.8 billion.

The ministry said stronger reserves and improved access to international markets had enhanced Pakistan’s ability to manage higher import costs and meet external debt obligations.

SBP maintains policy rate at 11.5 percent

The State Bank of Pakistan maintained its policy rate at 11.5 percent on September 14, citing elevated global oil prices as a key inflation risk.

Broad money contracted 5.3 percent between July 1 and September 11, compared with a 2.8 percent decline during the same period last year. The contraction reflected lower net domestic assets and seasonal repayments of private-sector credit.

Businesses and households repaid a net Rs364.5 billion in private-sector credit, although the outstanding stock of such credit remained 13 percent higher than a year earlier.

The KSE-100 index gained 882 points, or approximately 0.5 percent, in August to close at 176,976. Market capitalisation increased to Rs19.83 trillion, reflecting continued investor participation amid improving domestic indicators and uncertainty over global energy prices.

Government introduces targeted relief

To cushion households against higher fuel costs, the government introduced the Prime Minister’s Fuel Relief Scheme, providing targeted assistance to lower-income groups through a digital delivery mechanism without reducing the petroleum levy.

The government has also introduced austerity and fuel-conservation measures, including a 50 percent reduction in fuel allocations for official vehicles used for non-operational duties, restrictions on official travel and a ban on purchasing new vehicles and durable goods.

The ministry said these measures were intended to protect vulnerable households, moderate the impact of oil prices and preserve fiscal discipline.

Overseas employment and financial inclusion

Overseas employment continued to provide an important source of income and foreign exchange. The Bureau of Emigration and Overseas Employment registered 27,656 Pakistani workers for overseas employment in August 2026.

During the same month, the Pakistan Poverty Alleviation Fund disbursed 5,169 interest-free loans worth Rs381 million through 24 partner organisations. Cumulative lending under the programme reached Rs127 billion since 2019.

The ministry said continued revenue mobilisation, temporary and targeted relief, energy-sector reforms, financial inclusion and expenditure discipline would be essential to consolidating macroeconomic stability and supporting sustainable, private-sector-led growth.

It added that higher global oil prices remained the main external threat, while improving agricultural and industrial activity, resilient remittances and stronger financial buffers provided support for Pakistan’s economic recovery.