Govt expects floods will worsen inflation
• Increase in Consumer Price Index seen at 3.5-4.5pc in September
• Finance ministry says economic activity remains ‘broadly stable’
• Insists economy maintains trajectory of stabilisation, growth
ISLAMABAD: The government on Tuesday warned that the supply chain disruptions caused by ongoing floods could temporarily increase inflation despite improved fiscal and industrial performance.
“Due to ongoing floods in 2025, the agriculture sector is expected to suffer,” said the Ministry of Finance in its Monthly Economic Update and Outlook for September 2025. “Flood-related disruptions may exert pressure on food supply chains, leading to an uptick in prices. As a result, inflation is expected to rise temporarily but remain contained within the 3.5-4.5 per cent range in September 2025,” it added.
The finance ministry, however, expressed satisfaction that despite these disruptions, economic activity remained broadly stable. “The rebound in large-scale manufacturing, supported by encouraging trends in cement dispatches, automobile production, and allied industries, indicates strengthening industrial momentum in the months ahead,” it said.
The ministry expected the external sector to remain stable, with the current account deficit projected to stay manageable despite higher import demand. Remittances continued to provide strong support while exports showed early signs of recovery. The declining global commodity prices may help ease the import bill, it said.
Overall, the report said the economy maintained its trajectory of stabilisation and growth during the first two months of the current fiscal year, with moderating inflation, strengthening large-scale manufacturing, and contained fiscal imbalances despite the severe floods since July 2025.
It said the assessment of Kharif crops and livestock damages was currently in progress while the government had declared climate and agriculture emergencies nationwide to tackle escalating climatic challenges and support farmers impacted by the severe floods.
The report noted that large-scale manufacturing registered a significant year-on-year growth of 9pc in July 2025 and 2.6pc on a month on-month basis. Overall, 16 out of 22 sectors recorded positive growth, including textiles, wearing apparel, coke and petroleum products, non-metallic mineral products and pharmaceuticals.
Inflation measured by Consumer Price Index (CPI) moderated to 3pc in August 2025 and stood at 3.5pc during July-August FY26 as compared to 10.4pc last year.
The Ministry of Finance said the government would further improve fiscal performance in FY26, building on the strengthened fiscal accounts that delivered “an eight-year low fiscal deficit and a 24-year high primary surplus”.
The government also promised effective resource mobilisation and a prudent expenditure management strategy. Yet, it said the net federal revenues increased by only 7.7pc in July, supported by 23.9pc growth in non-tax revenues and 14.8pc in tax revenues.
Non-tax revenues in July were largely attributed to higher receipts from petroleum levy, dividends and defence.
During July-August FY26, FBR’s net collection expanded by 14.1pc while expenditures grew by 28.8pc. “Consequently, the fiscal deficit was contained at 0.2pc of GDP, while the primary surplus improved to Rs228.9 billion (0.2pc of GDP) compared to Rs107.1bn (0.1pc of GDP) last year.”
The current account posted a deficit of $624 million during July-August FY26, increasing from $430 million recorded last year.
Goods exports rose 10.2pc to $5.3bn, while imports increased 8.8pc to $10.4bn, resulting in a trade deficit of $5.1bn compared to $4.8bn. Remittances were up 7pc to $6.4bn, led by inflows from Saudi Arabia (24.6pc share) and UAE (20.6pc).
Net FDI inflows were recorded at $364.3 million, down 22pc. However, private and public portfolio investment recorded net outflows of $74.8 million and $11.8 million, respectively. As of Sept 19, foreign exchange reserves stood at $19.8bn, including $14.4bn with the State Bank, compared to $9.5bn total reserves as of the same period last year.
The finance ministry said that monetary conditions remained stable, and the stock market sustained its bullish momentum, reflecting investor confidence.
Although flood-induced disruptions pose temporary risks to inflation, the overall outlook signals a stable macroeconomic environment, with supportive trends in industry, external inflows and fiscal management expected to underpin sustainable growth going forward, it concluded.
Published in Dawn, October 1st, 2025