By Qudsia Bano

Pakistan’s import composition began shifting during the first half of FY26 as tariff rationalisation measures encouraged higher inflows of machinery, metals and transport-related goods, according to the State Bank of Pakistan’s Half Year Report 2025-26.

The report said the country’s imports increased 12.4 percent during H1-FY26, driven mainly by stronger domestic demand and increased industrial activity. According to the SBP, the structure of imports also showed visible changes following reforms under the National Tariff Policy 2025-30.

Import growth was stronger in sectors where tariffs were reduced across a larger number of tariff lines, particularly machinery, metals and transport-related categories. The central bank said the shift reflected improving industrial demand as businesses increased purchases of equipment and inputs amid recovering economic conditions.

Pakistan’s industrial sector grew 8.1 percent during H1-FY26, while large-scale manufacturing rebounded 4.8 percent after three years of contraction.

The report linked rising industrial imports to stronger production activity in automobiles, textiles, petroleum products and construction-related sectors. Machinery imports are often viewed as an indicator of future productive capacity because they support investment, industrial expansion and technological upgrading.

The SBP said easing inflation, lower interest rates and improved macroeconomic stability helped revive domestic demand for industrial goods and capital equipment during the review period. Average inflation declined to 5.2 percent during H1-FY26 from 7.2 percent a year earlier, while the policy rate was reduced by a cumulative 1,150 basis points between June 2024 and December 2025.

The report noted that lower input costs and relatively stable exchange rates also supported import demand. Pakistan’s exchange rate appreciated 1.3 percent during H1-FY26, helping reduce imported inflation and improving predictability for businesses purchasing foreign goods.

However, rising imports also widened pressure on the external account. The trade deficit increased by nearly 36 percent during H1-FY26 as import growth significantly outpaced exports, which declined 5 percent during the same period.

The report said weaker rice exports, falling commodity prices and regional trade disruptions contributed to the decline in exports. Despite these pressures, the SBP maintained that the increase in machinery and industrial imports partly reflected healthier economic activity rather than unsustainable consumption growth alone.

Economists often distinguish between productive imports, such as machinery and industrial equipment, and non-productive imports that contribute less directly to future output capacity. The report suggested that tariff rationalisation may gradually improve industrial competitiveness if imported machinery supports productivity gains and export-oriented manufacturing.

However, the SBP also acknowledged that Pakistan’s industrial base continues to face deep structural weaknesses, including low productivity, policy inconsistency and limited technological upgrading. The outlook for imports has become more uncertain following the Middle East conflict.

The report warned that rising oil prices, freight charges and insurance costs could increase import expenses further in coming months. Supply-chain disruptions affecting industrial raw materials and machinery could, in turn, hinder production activity and delay investment plans. For FY26, the SBP projected imports in the range of $63.5 billion to $64.5 billion compared with the official target of $65.2 billion.

The central bank stressed that sustaining higher industrial imports would require continued reserve accumulation, exchange-rate stability and stronger export performance to avoid renewed external imbalances.

Credit: INP-WealthPk