ISLAMABAD: The Pakistan Economic Survey on Thursday revealed that the government missed three major macroeconomic goals but managed to maintain external sector stability and achieve broad-based recovery in the outgoing fiscal year, despite adverse impacts of the Middle East war.
Missed Targets
According to the Pakistan Economic Survey 2025-26, the government failed to achieve the targets of 4.2% economic growth. The investment-to-GDP ratio and savings-to-GDP ratio also fell short of set goals. These indicators are considered fundamental for sustainable higher economic growth without falling into a debt trap. The Federal Board of Revenue's tax target is also being missed by a wide margin of over Rs1 trillion.
Achievements
However, the government was on track to achieving the primary budget surplus target, a key for the continuation of the International Monetary Fund Programme. The inflation goal may also be achieved despite supply shocks. Finance Minister Muhammad Aurangzeb, while sharing the main findings of the survey, stated that the twin deficits – the budget and current account – have been real issues for Pakistan for a long period and have now been brought under control.
The fiscal deficit stood at 0.7% of GDP during the first nine months of this fiscal year, while the primary balance remained in surplus. The current account posted a surplus of $72 million. The Finance Minister maintained that going forward, remittances will remain a very important component of external sector stability.
Challenges Faced
Aurangzeb narrated the difficult journey of fiscal year 2025-26, which began under the clouds of tariff uncertainty and the impact of floods in three rivers affecting crops in Punjab province. He noted that when the fiscal year started in July, the first challenge was trade uncertainty due to tariff discussions globally, which eventually allowed Pakistan to achieve a competitive position for exports, especially to the US. Right after that, floods hit, leading to rescue and relief efforts for rehabilitation and infrastructure reconstruction. In March, a regional conflict broke out. Out of these three exogenous factors, only tariff uncertainty was present at the time of the previous economic survey.
Economic Growth and Sectoral Performance
The minister said the government still achieved 3.7% economic growth, indicating broad-based recovery. The government was hopeful of achieving over 4% growth, but the war caused the target to be missed. Investment and savings targets were also missed, remaining low and needing significant improvement for higher growth.
To a question, the Finance Minister said investment and tax-to-GDP ratios were hovering around the same levels and must increase. The government is also going to miss its exports targets for this fiscal year, as exports remained negative by nearly 6%.
Planning Minister Ahsan Iqbal noted that nine million Pakistanis send $40 billion in remittances, but 250 million people produce hardly $40 billion worth of exports (goods and services). He called declining exports Pakistan's biggest failure, forcing the government to take loans as a stopgap arrangement. He questioned how Vietnam, with a 100 million population, attracted $38 billion in foreign direct investment, while Pakistan could hardly get $1.5 billion.
Reforms and Investment
The Finance Minister said reforms have been introduced in the FBR but will take at least one to two years to change the culture. Nepotism is being ended, but issues of theft and collusion remain. He added that local investment must lead foreign investment, and policy continuity is crucial. The government will implement the national tariff policy without changes, acknowledging that exports cannot grow in a year and will take time.
Unemployment and Poverty
According to the economic survey, unemployed persons increased from 4.5 million to 5.9 million, with the unemployment rate rising from 6.3% to 7.1%, the highest in 21 years. Poverty surged to an 11-year high of 29%, while income inequality reached its highest level in 27 years, as real incomes and consumption nosedived over the past seven years. Poverty increased significantly from 21.9% in 2018-19, and the national Gini coefficient rose from 28.4 to 32.7, indicating widening inequality.
The Finance Minister maintained that the government ensured broad-based economic recovery despite the regional conflict that hurt the region and the world.
FBR Performance and Provincial Grants
Regarding provincial grants for federal expenses, the Finance Minister said the arrangement with provinces would be for a certain period, more than one year. Three provinces, except Balochistan, agreed to freeze development expenses to give at least Rs900 billion to the Centre for defense and water sector projects, contingent upon FBR performance. The meeting with KP Chief Minister was productive, and all four chief ministers assured cooperation. However, KP Finance Advisor Muzzammil Aslam said KP's contribution was subject to a meeting with party leader Imran Khan.
Sectoral Growth
The Finance Minister highlighted growth in all three sectors. The livestock sector continues to grow, comprising 60% of agricultural GDP. Large-scale manufacturing grew 6.1% in FY26, the highest in four years, with 16 out of 22 sectors showing positive growth.
On the external side, the structural deficit has been a real issue, but on the fiscal side, a surplus has been shown and the deficit reduced. Remittances will remain a very important component of external balancing.
Aurangzeb said exports declined due to two major factors: food sector exports fell by $1.5 billion, with rice down $1.1 billion and sugar down $400 million. In July-May FY26, textile exports grew, with woven garments up 5%, home textiles 3%, and knitted garments 3%.
