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KSE-100 is expected to continue its positive momentum due to further monetary easing driven by improving external account position and continuous focus on re forms amid political stability. We anticipate the KSE-100 Index to post a robust re turn of 53.0% in CY26 and to achieve a historic benchmark of US$100bn market capitalization, primarily driven by higher sustainable RoEs of banks, enhanced profitability along with improving cash flows of E&P and OMCs, and robust profita bility of fertilizers. Market to reach 263,800 by Dec’26 on macroeconomic stability: KSE-100 Index is expected to continue its positive momentum in CY26, as a sustained focus on re forms and an improving external account position, amid political stability, are likely to create room for further monetary easing. Subdued returns on alternative asset classes, coupled with a stronger currency, are expected to make equities the pre ferred investment choice in CY26. We forecast the KSE-100 Index to reach 263,800 by Dec’26, implying a return of 53.0% (48.4% in US dollar terms). This return posi tions the KSE-100 Index to reach a historic US$100bn market capitalization for the first time. We believe that improving relations with the U.S. and GCC countries will help revive investment in Pakistan. A strong probability of continuity in the current political setup strengthens the case for equities to trade at multiples observed during periods of stability. Despite deliver ing a 188.6% return over the past 3-Yrs, the market is still trading at a 40.7% discount to its regional peers, while offering an attractive dividend yield of 6.2% for CY26. KSE-100 outperformed peers in CY25 with record liquidity: Strong external account position on the back of disciplined approach under the IMF program, and Pakistan’s re-emergence on the global stage following its clash with a neighboring country, con tributed to the robust performance of the KSE-100 Index in CY25TD. Investor confi dence, initially demonstrated by Companies and individuals, was further bolstered by mutual funds in the latter half of the year. Subsequently, the KSE-100 index posted positive return for the third consecutive year, achieving 49.7% in CY25TD (49.4% in US$ terms), with record high liquidity. Policy rate to fall in single digit while maintaining high real interest rates: Strong external account position, driven by prudent fiscal policies under the IMF’s Extended Fund Facility (EFF), would allow the SBP to continue monetary easing, as inflation is likely to fall toward the lower end of the central bank’s target range post Jun’26. Ro bust remittances, along with improving access to external commercial financing on the back of rating upgrades from S&P and Moody’s, would create room for higher imports as economic activity picks up. However, we expect the SBP to maintain rela tively high positive real interest rates of 4–5% to avoid another boom-bust cycle. MSCI EM entry to bring foreigners interest back: We expect foreign investment to return to local equities given strong macroeconomic stability, authorities focus on reforms and currency stability, supported by Pakistan likely entry into MSCI EM index and falling global interest rate environment. We expect Pakistan equities to be includ ed in the MSCI EM Index, as three KSE- 100 stocks are likely to meet the eligibility criteria, while two others may fall marginally below the threshold. However, if local equities are not upgraded, their weight in the FM Index would increase considerably. Model Portfolio: We have ‘Overweight’ stance on Banks, E&P, Fertilizer, Cement, OMCs, Autos, Textile and Technology as we expect these sectors to be the benefi ciary of lower interest rates, structural reforms and subdued commodity prices. How ever, we have ‘Underweight’ stance on Power and Chemical due to changes in con tracts of IPPs and subdued core margins, respectively. Top Picks: OGDC, PPL, UBL, MEBL, HBL, FFC, ENGROH, PSO, LUCK, FCCL, INDU, ILP and SYS.

Stability continues to drive the KSE-100 index Institutions alignment to turn challenges into opportunities: Current coalition polit ical setup has demonstrated its strength by passing the 27th Amendment with a two thirds majority and by turning challenges into opportunities on the diplomatic front. The downing of Indian fighter jets during a four-day clash proved to be a turning point in U.S.–Pakistan relations and strengthened Pakistan’s ties with GCC nations amid the evolving Middle East situation. We expect an improvement in relations with Afghanistan, given its dependence on Pakistan for trade and global pressure to ad dress terrorism. Monetary easing to continue on strong external account position: Strong external account position, driven by prudent fiscal policies under the IMF’s Extended Fund Facility (EFF), would allow the SBP to continue monetary easing, as inflation is likely to fall toward the lower end of the central bank’s target range. Robust remittances, along with improving access to external commercial financing on the back of rating upgrades from S&P and Moody’s, would create room for higher imports as economic activity picks up. However, we expect the SBP to maintain relatively high positive real interest rates of 4–5% to avoid another boom-bust cycle. Structural reforms under IMF to combat low productivity: IMF’s program strong focus on reforms across fiscal management, poverty alleviation and social protec tion, monetary and exchange rate policy, the financial sector, energy, broader struc tural areas, and climate-related issues would improve country’s productivity by bringing efficiencies. These measures are intended to tackle Pakistan’s deep-rooted structural weaknesses, including weak productivity, limited economic openness, inef ficient allocation of resources, and high exposure to climate risks. Within the EFF and RSF framework, the policy agenda supports a phased fiscal adjustment aimed at de livering a primary surplus of 1.6% of GDP, underpinned by net growth of 3.2% of GDP and a more equitable tax regime. Lower commodity prices to ease import bill and inflation: Pakistan stands to benefit from falling global commodity prices, which will lower import bill and keep the infla tion downward sticky. Whereas, favorable weather conditions are also expected to boost wheat production, helping to ease prices post flood surge. Moreover, diversion of LNG cargoes would save ~US$1bn/annum in import bill besides, providing room for E&P companies to boost their production and bringing average gas prices down ward by replacing expensive LNG with cheaper domestic flows. Reforms to build resilience and restore global credibility: Gov’t efforts to execute structural reforms to correct economic mismanagement, fiscal leakages through un checked subsidies, and institutional inefficiencies would channelize funds to produc tive use and reduce external dependence. Targeting energy (power and gas), taxation structure, SOEs governance and divestments, with these actions aiming to stabilize fiscal finances, restore global credibility, and in turn attract investment. CPEC is a transformative leap towards economic future: Unlike Phase-I, which was dominated by power and transport projects, Phase-II is structured around industrial parks, special economic zones, port and rail upgrades, and a broader push to attract Chinese manufacturing and mining investment into Pakistan. Fast track implementa tion of US$7.0bn ML-1 and US$2.0bn Karakoram Thakot-Raikot section would pro vide impetus to economic growth in the near term. Digitalization to unlock economic potential: Rising digitalization shows potential for a new digital Pakistan that creates structural growth opportunities for banks, fintech, and technology platforms, further benefiting individuals and corporates alike. Gov ernment-backed initiatives have accelerated transaction growth while improving economic documentation and raising tax collection. Foreign flows to follow reforms: We expect foreign capital flows to improve support ed by renewed foreign investor confidence amid improving macroeconomic indica tors and Pakistan’s upgraded sovereign credit profile. Signs are aligning for the next phase of capital inflows as policy focus has decisively shifted toward attracting long term, project-based investments to generate sustainable foreign inflows and en hance export capacity, while limiting rollover risks.

K SE-100 to be candidate for MSCI EM in CY26: We expect Pakistan equities to be included in the MSCI EM Index next year, as three KSE-100 stocks are likely to meet the eligibility criteria, while two others may fall marginally below the threshold. However, if local equities are not upgraded, their weight in the MSCI FM Index would increase considerably. CY25 – Momentum continues for the 3rd consecutive year: Strong external account position given disciplined approach under the IMF program, and Pakistan’s re emergence on the global stage following its clash with a neighboring country, con tributed to the robust performance of the KSE-100 Index in CY25TD. The signing of a defense pact with KSA and improved relations with the US along with improvement in credit ratings by Int’l agencies has further supported the rally. Investor confidence, initially demonstrated by Companies and individuals, was further bolstered by mutu al funds in the latter half of the year. Bottom-up approach yielding an index target of 263,800 by Dec’26: We have adopt ed a Bottom-up approach for Pakistan equities in CY26 and have arrived at a KSE100 index target of 263,800 by Dec’26, implying a return of ~53.0% (~48.4% in US$ terms), including an impressive dividend yield of ~6.3%. Our index target is primarily a function of our AKD’s universe Dec-26 TP based on Risk free assumption of 10.5% and market risk premium of 6.0%. Earning growth model yields similar target: Based on the earnings growth approach, our index target comes at 262,418pts, implying an upside of ~52.2% (~47.6% in US$ terms). The target is primarily a function of an average AKD universe 14.9% earnings growth for the next year and dividend yield of 6.3% with expectation of multiple rerating to 11x from current level of 8.4x

 

Institutions alignment to turn challenges into opportunities The current coalition political setup has demonstrated its strength by passing the 27th Amendment with a two-thirds majority and by turning challenges into oppor tunities on the diplomatic front. The downing of Indian fighter jets during a four day clash proved to be a turning point in U.S.–Pakistan relations and strengthened Pakistan’s ties with GCC nations amid the evolving Middle East situation. We ex pect an improvement in relations with Afghanistan, given its dependence on Paki stan for trade and global pressure to address terrorism. Coalition setup shows power by passing 27th Amendment: The 27th Amendment in the Constitution of Pakistan that introduces significant structural reforms in judicial and military governance manifest authority of the existing coalition setup. It estab lishes a separate court to handle constitutional disputes. The amendment restruc tures the military command by making the Army Chief as Chief of Defence Forces, while also creating a National Strategic Command selected by the Prime Minister. These reforms could enhance institutional clarity, governance efficiency, and deci sion-making stability, potentially improving investor confidence and supporting do mestic and foreign investment by creating a clearer legal and strategic framework. Pakistan relations with US take a U turn: U.S. intervention during the recent escala t ion between the two nuclear-armed neighbours, India and Pakistan, proved to be a turning point in improving Pakistan–U.S. relations. Washington used this opportunity not only to strengthen its influence in Pakistan but also to advance its broader stra tegic ambitions in South Asia and the Middle East. Pakistan’s nomination of Presi dent Trump for the Nobel Peace Prize further helped shift the trajectory toward a more positive bilateral relationship. Building on this momentum, Pakistan and the U.S. have concluded several agreements, including a US$500mn partnership frame work covering enriched rare-earth elements and mineral refining and processing, alongside a nuclear-arms–related deal. In addition, the U.S. EXIM Bank approved US$1.3bn in financing to support copper and gold extraction at the Reko Diq project. Ties with China continues to grow stronger: Pakistan and China agreed to formulate a five-year roadmap to further strengthen bilateral relations on both political and economic front. In addition, both sides agreed to expedite work on the Karakoram Thakot–Raikot section, while also considering third-party participation in the US$6.7bn ML-1 project. Notably, China remains Pakistan’s largest creditor, with lending totaling US$23.5bn, and its largest trading partner, accounting for ~21% of total trade. China’s consistent diplomatic support for Pakistan, particularly on issues such as Kashmir, continues to underpin their strategic partnership. Gulf states emerging as key partners: The evolving geopolitical dynamics in the Mid dle East have enhanced Pakistan’s strategic importance for GCC countries, under scoring its position as a highly capable military power after clash with India. Paki stan’s signing of a defense pact with Saudi Arabia has reshaped the region’s security architecture. This strategic partnership also supports stable oil supplies and encour ages investment in Pakistan’s energy and infrastructure sectors. Moreover, GCC countries, particularly KSA and the UAE, play a pivotal role in sustaining Pakistan’s external financial stability through timely rollovers of sovereign deposits, including US$5bn from Saudi Arabia and US$3bn from the UAE. The Gulf region is also a major source of remittances for Pakistan, accounting for approximately 55% of inflows, with millions of Pakistani expatriates employed across GCC states. India, Pakistan tension to persist: We do not foresee escalation between neighbour ing India after Pakistan clearer victory in a four day clash during May’25, in which Pakistan shot down seven Indian planes and destroyed their defense system. How ever, relations with India are likely to remain strained under Modi's leadership. Afghanistan remains a key security concern: Relations with Afghanistan have wors ened since Oct’25 after deadly clashes resulted in border closures. We expect trade normalization given Afghanistan’s heavy dependence on Pakistani goods and route. Additionally, engagement by GCC nations and neighboring countries such as China and Iran may help de-escalate tensions and foster cooperation on counterterrorism.

Strong external account position, driven by prudent fiscal policies under the IMF’s Extended Fund Facility (EFF), would allow the SBP to continue monetary easing, as inflation is likely to fall toward the lower end of the central bank’s target range. Robust remittances, along with improving access to external commercial financing on the back of rating upgrades from S&P and Moody’s, would create room for higher imports as economic activity picks up. However, we expect the SBP to main tain relatively high positive real interest rates of 4–5% to avoid another boom-bust cycle. Higher positive real interest rates to be the norm: We expect the SBP to maintain forward 12-month positive real interest rates of 4–5%, with inflation gradually falling toward the lower band of the central bank’s target range after peaking in Jun’26. Our assumption of 4–5% real interest rates is significantly higher compared with the 20 year average of +77 bps and the 10-year average of –4 bps. We expect inflation to average 6.3% in FY26 and 4.0% in FY27, based on our assumptions of improved food supplies, subdued Int’l oil prices, and lower periodic energy price adjustments. How ever, fiscal slippages, global energy supply shocks, and climate-change effects remain key risks to our inflation projections. Money supply to remain supportive: We expect money supply growth to slow from FY26 onward but remain in double digits, reflecting lower government budgetary needs amid a curtailed fiscal deficit. Meanwhile, we expect private sector credit to expand, driven by borrowing from key sectors such as textiles, wholesale and retail, chemicals, and steel. Consumer financing is likely to pick up pace, particularly in the automobile segment, on the back of easing financial conditions, improved consumer sentiment, and a stable macroeconomic environment. External account to remain in balance: External account is forecasted to remain in balance due to robust remittances and higher growth in services exports amid sub dued commodity prices. However, we expect exports to decline in FY26 and food imports to surge due to flood induced disruption in agriculture output. We foresee current account to remain in surplus for FY26 by US$99mn and turned to deficit in later years as growth in imports would outpace increase in remittances and exports. Subsequently, we foresee SBP FX reserves to near US$25bn by FY28 along with a reduction in the SBP’s forward/swap liabilities. Growth to remain modest: GDP growth is expected to improve supported by stabili zation and subdued commodity prices, with gains from structural reforms. We ex pect GDP growth to reach 4.0% in FY26 and further improve to 4.1% in FY27, driven by better performance in the agriculture and services sectors, along with continued growth in industries.

Inflation to moderate on improved supplies Continued relatively tight monetary and fiscal policies, amid a stable currency, are expected to keep inflation under control. However, supply-side frictions arising from an abnormal monsoon and floods may push inflation above the SBP’s targeted range toward the end of FY26, before reverting to below the SBP target in FY27. We esti mate inflation to average 6.3% in FY26 and 4.0% in FY27, driven by lower oil prices and a moderate increase in food prices. The interaction of restrained domestic demand and improved supply conditions led to a steep decline in inflation, from 23.4% in FY24 to an eight-year low of 4.5% in FY25. We expect inflation to remain elevated until Jun’26, with a likelihood of breaching the SBP’s targeted upper band of 7.0% in 4QFY26 due to a low base effect. There after, inflation is expected to fall below the SBP’s targeted range in FY27. Our expec tations are based on disinflation in heavyweight categories, including Food, Housing, Clothing, Restaurants, and Transport. Food prices are expected to normalize amid improved supply conditions. Moreover, the Transport index is expected to increase in FY26 due to increase in levies, before moderating in FY27 given stable oil prices and lower increases in levies. We also anticipate moderation in Housing index, given relatively smaller adjustments in electricity and gas tariffs. However, inflation outlook is subject to certain risks, including escalation in geopoliti cal conflicts, recurrence of food inflation pressures, uncertainty related to the adjust ments in administered energy prices and any additional fiscal contingency measures.

Current account to remain in balance Resilient workers’ remittances supported by moderation in interest and dividend repatriation, is expected to keep current account in balance for the current fiscal year. However, we expect both trade and services deficits would grow due to in crease in economic activity and food supplies disruptions on the back of abnormal monsoon. Subsequently, we foresee current account to post minuscule surplus of US$99mn in FY26 and deficit of US$1.1bn in FY27. We foresee trade and services deficit to increase to US$36.8bn by FY27 as average 7.0% annual rise in imports is likely to outpace 3.3% annual pick up in exports during this period. Lower prices and RLNG divergence to ease pressure on import bill: Non-oil imports, particularly machinery, metals, agriculture, and transport-sector imports, are antici pated to grow at a faster pace due to rising domestic demand. We expect growth in the food sector to remain moderate despite the surge in 5MFY26, owing to improve ments in food supplies. Meanwhile, petroleum and textile imports are expected to decline due to lower pric es. The diversion of RLNG cargoes from Jan’26 would further support the decline in petroleum imports, as we expect 35 cargoes to be diverted on an annual basis. Tex t ile imports are also expected to remain contained, supported by stable cotton pro duction this year despite floods and an abnormal monsoon. Downturn in Rice to dent to goods exports: Overall goods exports are expected to decline in FY26 due to a slump in rice exports, driven by the emergence of intense competition in the international market. We expect rice exports to fall by approxi mately 38% to below the US$2bn mark in FY26, a level last witnessed in FY18. Textile exports, however, are expected to remain resilient despite an uncertain environment arising from US tariffs. Knitwear exports are projected to post double-digit growth in FY26, while growth in bedwear and readymade garments is expected to moderate during the year. In contrast, cotton cloth and towel exports are expected to decline due to lower volumes. Petroleum group imports are also expected to remain lower due to subdued prices, despite reduced utilization of furnace oil (FO) in the domestic market, particularly following the imposition of the petroleum levy. However, tech nology exports are expected to record double-digit growth in the near term. Remittances to provide significant support: Worker’s remittances continue to show resilience in coming years given favorable policy measures and stable kerb premium. Increased emigration over the past three years due to subdued domestic economic activity, is also contributing to higher inflows. Moreover, the Primary income deficit is likely to fall to US$8.1bn by FY28 from US$9.1bn in FY25 given global monetary easing amid moderate increase in external debt.

Rupee to remain stable Rupee is expected to remain strong against Greenback supported by a well man aged external account position, resilient remittances and rising IT exports amid tight monetary and fiscal policies. Stability in the PkR has translated into a reduction in inflation which is expected to remain in single digit. We foresee PkR to de value at an inflation differential given building up of FX reserves, improved exter nal account, tight monetary policy and prudent fiscal approach amid a focus on reforms to address structural issues. Continued efforts to curb smuggling along with a focus on preferential trade agreements, would also support stability. FX movement remain modest as we navigate the uncertainties around the flood im pact, reflecting strong footing of our economy and external accounts to weather shocks. This would build our comfort on stable exchange rate, which helps to build FX reserves. FX market largely display stability for the past two and a half years with the rupee hovering around PkR280/US$, given curbing of parallel market through nationwide crackdown against illegal currency trading, smuggling and hoarding. This is supported by simultaneous efforts of SBP to implement key reforms to improve exchange market functioning. Central bank efforts to improve communication and transparency, by publishing semi annual targets of FX reserves and FX interventions, would help both local and foreign participants to gauge overall FX demand. Moreover, the revision in Foreign Exchange Exposure Limits (FEEL) has enhanced flexibility of banks to handle FX flows while maintaining prudent risk management. A stable FX market has allowed the SBP to conduct sizeable FX purchases, which have helped build reserves. During the period from Jun’24 to Sep’25, SBP has made net purchases of US$9.7bn from the FX market. However, the REER shows uptick since May’25 from 97.8 to 104.8 in Nov’25 because of higher inflation reading and appreciation of Pak Rupee against US$

FX reserves to grow as access to borrowing improves Improved prospects of higher financial inflows under the IMF program amid con trolled Current Account Balance (CAB), opportunistic SBP FX purchases, rating up grades by Moody’s and S&P and stable rupee, would help central bank to build FX reserves. We forecast SBP reserves to reach around US$25bn mark by FY28, accompanied by reduction in the SBP’s forward/swap liabilities during this period. Balanced current account to remain the key: The current account is anticipated to remain balanced this year due to tight monetary policy and a prudent fiscal approach amid a flexible exchange rate. This, combined with improved financial inflows, both multilateral and bilateral, as well as rollovers of safe deposits, would provide the SBP room to build external buffers. FDI to remain at mainstay: We expect financial account to create a room of US$11bn over the next 3-Yrs, more than half of which is likely to be driven by Foreign Direct Investment (FDI). Multilateral disbursements are projected to remain the mainstay majorly from WB and ADB. Meanwhile, key bilateral creditors fully maintaining their exposure through new financing activities. Access to external commercial financing is expected to gradually improve, including through a modest Panda bond issuance in FY26 and expected market re-entry in FY27. Furthermore, the SBP FX market inter ventions, focusing on buying dollars would allow central bank to cover interest pay ments and build FX reserves. Reserves to reach US$25bn by FY28: SBP FX reserves are anticipated to reach US$24.6bn by FY28, import cover of 3.5 months, up from US$15.8bn in FY25, along with a reduction in the SBP’s forward/swap liabilities by a quarter alone in FY26. Multilaterals to remain major source of financing: Majority of the external debt stock, US$107bn or 26% of GDP, is owed to multilateral creditors. The country owes US$43.3bn to multilaterals, followed by US$18.2bn to bilateral creditors, and US$11.5bn to the private sector. IMF lending stood at US$9.0bn as of Sep’25.

 

GDP growth continues to improve GDP growth is expected to improve supported by stabilization and subdued com modity prices, with gains from structural reforms. We expect GDP growth to reach 4.0% in FY26 and further improve to 4.1% in FY27, driven by better performance in the agriculture and services sectors, along with continued growth in industries. Agriculture and Services to gain pace: We expect the agriculture and services sec tors to gain momentum in FY26, while the industrial sector is likely to grow at a slightly lower pace than last year, though still outperforming the other segments. The agriculture sector is projected to grow by 2.7% in FY26 and 3.1% in FY27, com pared to 1.5% in FY25, supported by improved production of major crops and contin ued growth in livestock, despite floods and an abnormal monsoon season. Important crops are expected to grow by 2.4% in FY26, compared to a contraction of 13.1% in the previous year, driven by improved production of wheat, cotton, maize, and sugarcane. In contrast, rice production is expected to decline by 3.2% due to higher flood incidence and spill over effect of increased competition in international markets. Moreover, livestock and poultry are expected to contribute positively, sup ported by lower feedstock prices, particularly maize. Industrial sector to remain above 5%: Industrial sector growth is expected to slow but remain above the 5% level in FY26, supported by a significant reduction in inter est rates, a stable currency, subdued commodity prices, and lower energy tariffs. In addition, industry lower capacity utilization levels would support growth without requiring significant capital expenditure. Recently introduced electricity packages for industries and agriculture are also expected to further aid growth. Services to gain from digitalization and documentation: The services sector is likely to benefit from spillover effects of enhanced industrial production and increased trading activity, further supported by rising digitalization and documentation of economy.

Fiscal imbalances to narrow on reform push Fiscal imbalance is expected to reduce considerably over the next three years, sup ported by robust growth in tax revenues alongside prudent expenditure manage ment. Subsequently, we anticipate the tax-to-GDP ratio to remain at 11.5% over the next 3-yrs. Meanwhile, expenditure growth is expected to remain contained, primarily due to a significant decline in markup payments and controlled subsidies. Tax revenue growth to be backed by reforms: Tax revenues are anticipated to grow at a double-digit pace, despite our expectation that inflation would fall to 4% in FY27, driven by measures legislated in FY25 and additional policy initiatives aimed at enhancing tax collection. Moreover, a continued focus on broadening the tax net, through the removal of GST and income tax exemptions and the alignment of with holding taxes (WHT) across all taxpayers, would support revenue growth. Further more, implementation of the new Agriculture Income Tax (AIT) regime by provinces, along with measures to strengthen compliance, curb underreporting, and improve communication, is expected to support provincial revenue growth at an average an nual rate of ~17% over the next three years. Non-Tax revenue to continue providing support: Non-tax revenues are expected to grow by 2% in FY26, compared with an average growth of 61% over the past 3-Yrs, primarily due to lower profit transfers from the SBP and reduced markup income from PSEs. Nevertheless, SBP is likely to remain the largest contributor to non-tax revenues, given the federal government’s continued reliance on open market opera tions (OMO). Additionally, we assume the petroleum development levy (PDL) to reg ister growth of over 20% over the next two years, driven by an increase of PkR12.5/ ltr from current levels by Jan’27, along with average annual petroleum sales growth of 6% in white oil during the period. Expenditures to grow below inflation levels due to cut in policy rate: Gov’t expendi tures are expected to remain contained, reflecting lower markup payments and a reduction in subsidies, despite higher defense spending and the maintenance of de velopment expenditures. We estimate markup expenses to decline by 8% in FY26, as the impact of the policy rate reduction to 10.5% begins to materialize. Subsidies are projected to fall by 20% in FY26, supported by the settlement of power sector circu lar debt and an ongoing push for SOE reforms. Meanwhile, development expendi tures are expected to be maintained to meet the IMF’s primary surplus target. Grants are likely to continue increasing due to higher allocations for social protection schemes and spending on programs focused on structural reforms to address core inefficiencies. Fiscal deficit to fall below 3% by FY28: The broadening of tax base to include agricul ture and services sectors, tightening of taxation on the real estate sector, and the removal of non-filer category combined with a prudent approach to spending (including pension reforms) are expected to significantly reduce the fiscal deficit. We anticipate the fiscal deficit to fall to 3.9% for FY26, further declining to 2.8% by FY28.

Structural reforms under IMF to combat low productivity IMF’s program places strong focus on reforms across fiscal management, poverty alleviation and social protection, monetary and exchange rate policy, the financial sector, energy, broader structural areas, and climate-related issues. These measures are intended to tackle Pakistan’s deep-rooted structural weaknesses, including weak productivity, limited economic openness, inefficient allocation of resources, and high exposure to climate risks. Within the EFF and RSF framework, the policy agenda supports a phased fiscal adjustment aimed at delivering a prima ry surplus of 1.6% of GDP, underpinned by net growth of 3.2% of GDP and a more equitable tax regime. Robust tax collection to achieve primary surplus: Under the FY26 budget, the gov ernment targets an underlying primary surplus of 1.6% of GDP, building on tax measures legislated in FY25 and introducing additional steps to enhance tax collec tion and fairness. The budget focuses on broadening the tax net by removing GST and income tax exemptions, aligning withholding taxes across taxpayers, and improv ing compliance. On the expenditure side, wage and pension increases have been contained, hiring restricted to critical positions, and power subsidies curtailed, creat ing fiscal space for higher social spending, particularly under BISP. However, FY26 revenue projections have been revised downward due to flood-related growth dis ruptions, lower nominal GDP, weaker FBR and provincial collections, and reduced CPP levy receipts. In response, the authorities are reprioritizing spending, utilizing contingency buffers and cutting non-essential current expenditure, especially at the provincial level, while remaining committed to achieving the primary balance target through continued fiscal discipline and structural reforms. Enhanced social protection to reduce poverty and build resilience: Strengthening social protection and human capital development remains central to the program, particularly in light of recent floods and rising poverty, which increased to 25.3% in FY24. The authorities have strengthened the BISP budget, with the FY26 allocation including a 20% increase in spending on UCT and CCT programs, allowing the Kafaa lat cash transfer to rise from PkR13,500 to PkR14,500 and expanding coverage by 200,000 families to 10.2mn households. Full execution of CCT programs, focused on education and nutrition, remains critical to improving human capital outcomes, alongside closer coordination with provinces to ensure effective targeting. In parallel, health and education spending is rising, with most provinces budgeting sizable in creases in FY26, expected to lift aggregate spending to 2.8% of GDP, supporting inclu sive growth and long-term productivity gains. Tight and data-dependent monetary policy to anchor inflation and safeguard sta bility: Monetary policy needs to remain appropriately tight and data dependent to durably anchor inflation within the SBP’s target range, with the SBP maintaining a positive real policy stance on a forward-looking basis amid elevated uncertainty. While headline inflation has temporarily eased, the SBP continues to closely monitor flood-related risks to inflation and the external account and stands ready to act deci sively to keep expectations well anchored, supported by strengthened policy com munication and a clearer MPC reaction function. In parallel, rebuilding reserve buff ers through FX purchases and deeper FX market development remains critical to con fidence, supported by greater reliance on interbank trading, exchange rate flexibility, and measures to shift remittance flows to formal channels. Financial stability will be preserved through firm enforcement of prudential regulations, including timely re capitalization or resolution of undercapitalized banks, alongside broader financial sector reforms to support capital market development and private-sector credit growth. Power and gas sector reforms to stem losses and contain circular debt: Structural weaknesses in the energy sector continue to weigh on economic efficiency, necessi tating timely tariff adjustments and sustained cost recovery to prevent further accu mulation of circular debt (CD). In FY26, CD pressures are expected to ease on the back of improved recoveries and lower technical losses, supported by regular quar terly tariff notifications and monthly fuel cost adjustments, while PkR400bn in stock clearance subsidies is expected to keep net CD accumulation at zero. Reforms are be ing reinforced through greater private sector participation in DISCOs, with the first round of privatization for three DISCOs expected in early 2026, alongside steps to re structure transmission and launch a wholesale electricity market. In the gas sector, semiannual tariff adjustments, enhanced CD monitoring, and coordinated manage ment of RLNG surplus remain priorities, supported by improved data transparency and the development of a comprehensive CD management plan. Governance, anti-corruption, and SOE reforms to support sustainable growth: The authorities are advancing reforms to strengthen governance, enhance anti-corruption effectiveness, improve SOE oversight, and foster private-sector-led growth. As a key prior action, the Governance and Corruption Diagnostic (GCD) report was published in Nov’25, with work underway to finalize and publish the associated action plan follow ing broader stakeholder consultations. Reforms to the asset declaration framework are progressing, including plans to publish asset declarations of high-level federal civil servants, expand coverage to provincial officials, and allow bank access to declara tions. In parallel, the National Accountability Bureau will lead risk-based action plans to address corruption vulnerabilities across high-risk agencies, supported by enhanced provincial anti-corruption capacity and improved access to financial intelligence, rein forcing institutional integrity and investor confidence.

Pakistan’s reform agenda is gaining traction across energy, fiscal, and governance fronts to stabilize the macro framework. Energy sector reforms aim to restore cost recovery and contain circular debt through tariff rationalization, subsidy withdraw al, and gas price alignment, improving cash flows and investment visibility. Privati zation has re-emerged as a core fiscal tool, targeting banking, aviation, power dis tribution, and infrastructure to reduce subsidies and attract FDI. Tax reforms are increasingly technology-led, with digitization and AI-driven en forcement broadening the tax base and supporting revenue growth. Stronger bor der enforcement is curbing smuggling and FX leakages, aiding formalization and protecting domestic industry. Governance, anti-corruption, and SOE reforms, though still early, are laying the groundwork to reduce fiscal drag, enhance ac countability, and rebuild institutional credibility over the medium term. Energy reforms to restore cost recovery and contain circular debt: Pakistan’s energy framework is undergoing structural correction to arrest circular debt and restore cost recovery. Key measures include aggressive tariff rationalization, subsidy withdrawal, gas price alignment with revenue requirements, RLNG import curtailment, and struc tured settlement of legacy receivables—gradually improving sector cash flows, bal ance-sheet health, and medium-term investment visibility. Privatization to remain core for fiscal efficiency: After prolonged stagnation, privati zation has re-entered the reform agenda as a fiscal and efficiency lever. The govern ment is advancing divestments across banking, aviation, power distribution, and in frastructure, supported by governance cleanup and fast-track facilitation. Successful execution is central to reducing subsidies, rebuilding confidence, and unlocking FDI. Technology-led tax reforms to broaden base: Tax administration is shifting toward technology-led enforcement and compliance-based revenue mobilization. Digitiza t ion, AI-driven audits, POS integration, customs targeting, and centralized tax policy creation are improving documentation and collections. Growth in tax revenues and f iler expansion are signaling a positive shift, though future sustainability hinges on execution and political continuity. Border enforcement to curb leakages: Enhanced border enforcement is emerging as a key macro-stabilization tool. Notably, crackdowns on smuggling, tighter Afghan/ Iran transit protocols, fencing, security scanners, and digital checkpoints are curbing illicit trade of goods and currency leakage. These steps are anticipated to support formalization, limit FX market distortions, protect the domestic industry, and rein force the credibility of fiscal and trade reforms. Anti-Corruption push to strengthen credibility: Governance reforms are being posi t ioned as growth enablers rather than optics, led by the IMF-backed diagnostics re port, major steps including asset declaration frameworks, AML/CFT strengthening, and regulatory streamlining aim to reduce rent-seeking, improve fiscal discipline, and restore institutional trust. However, progress remains at nascent stages, but the foundations are being laid for increased efficiency and accountability. SOE reforms to reduce fiscal drag: SOE restructuring is accelerating amid rising fiscal pressures. Reforms focus on governance laws, independent boards, IFRS adoption, performance monitoring, and selective privatization or PPPs. With the budgetary support remaining elevated for the aforementioned process, increased oversight and defined ownership frameworks remain critical to containing losses, debt accumula t ion, and long-term contingent liabilities.