Inflation expected at 7.5% as tight policies continue
ISLAMABAD:
The government has set its sights on achieving 4.2% economic growth for the upcoming fiscal year (FY26), banking on a rebound in both the struggling agriculture and industrial sectors. However, officials caution that hitting this target will rely heavily on effective economic management.
A 7.5% inflation target has also been set for FY26, with warnings that the external sector could face headwinds from multiple factors.
The government, led by Prime Minister Shehbaz Sharif, will maintain tight fiscal and monetary policies for a fourth straight year as part of its fiscal consolidation efforts. The proposed plan for FY25-26 will go before the Annual Plan Coordination Committee (APCC) for approval on Monday, ahead of submission to the National Economic Council (NEC), which is chaired by the prime minister.
According to the plan, the economy is projected to expand by 4.2% overall, with commodity-producing sectors expected to grow by 4.4%. This growth is driven by a projected 4.5% increase in agriculture and 3.5% growth in Large Scale Manufacturing (LSM).
Agriculture underperformed this year, growing only 0.6% as major crops registered negative growth. For next year, the plan anticipates a 6.7% rebound in major crops and a 7% increase in cotton ginning, alongside strong livestock sector performance.
The government claims that livestock growth this year was 4.7%—the highest in 25 years—and expects 4.2% growth for the livestock sector next year.
In the industrial sector, a significant recovery in LSM is projected, with growth of 3.5%, supported by 3% growth in mining and quarrying and steady gains in construction and electricity, gas, and water supply.
The electricity, gas, and water supply sector—which the government claimed surged by 29% this year—is forecast to moderate to 3.5% growth next year, amid questions about the credibility of this year’s reported spike.
The construction sector, which the government said expanded by 6.6% this year, is targeted for more modest 3.8% growth in FY26.
The plan outlines that fiscal and monetary policies will remain focused on stability and consolidation. Inflation is expected to settle at 7.5%, influenced by the low base effect, potential trade tensions, and tariff rationalisation efforts.
The government also intends to significantly reduce import duties to open up the economy to foreign competition, following the recommendations of local and international consultants.
The services sector—the largest contributor to GDP—is projected to grow by 4%, driven by gains in wholesale and retail trade, transportation and communications, financial services, and real estate.
The National Accounts Committee recently approved a 2.7% economic growth rate for the current year, falling short of the 3.6% target due to a sharp downturn in key commodity-producing sectors. This included a 13.5% drop in major crops caused by adverse weather, less rainfall, input shortages, and policy changes.
Despite these challenges, the new plan expresses cautious optimism, contingent on robust macroeconomic management and stable external conditions.
For FY26, the government has set a national savings target of 14.3% of GDP, with the investment-to-GDP ratio expected to rise to 14.7% from 13.8% this year. This would narrow the savings-investment gap, financed by modest external inflows. The current account deficit is projected to stay low at 0.4% of GDP.
The investment-to-GDP target was missed this year, reflecting a broader trend of falling short of annual goals.
Public investment is forecast to rise from 2.9% to 3.2% of GDP, while private investment is expected to grow from 9.1% to 9.8%. This year, the private investment target was significantly missed.
The plan also cautions that the external sector could face renewed pressure from easing import restrictions and upcoming debt repayments, potentially widening the current account deficit. However, strong remittance flows, recovering exports, and anticipated external financing are expected to help cushion these pressures and support external stability, the plan added.
