By Qudsia Bano

Pakistan’s services sector expanded 3.1 percent during the first half of FY26 as improving industrial and agricultural activity boosted wholesale trade, transportation and related services, according to the State Bank of Pakistan’s Half Year Report 2025-26.

The report showed services-sector growth increased from 2.6 percent in H1-FY25 to 3.1 percent during the review period.

According to the SBP, stronger performance in commodity-producing sectors created positive spillover effects across the broader economy, supporting recovery in trade and service activities.

Wholesale and retail trade, transport and storage, and public administration and social security emerged as key contributors to services growth during H1-FY26.

The report linked the improvement to higher industrial production, stronger domestic demand and increased movement of goods within the economy.

Pakistan’s industrial sector grew 8.1 percent during H1-FY26 compared with just 0.5 percent a year earlier, while large-scale manufacturing rebounded 4.8 percent after remaining in contraction during the previous three years.

Construction activity also improved during the period because of increased public development spending, easing input costs and concessional housing schemes introduced by the government.

The SBP said stronger activity in manufacturing, transportation and construction naturally translated into higher demand for logistics, trade and business services.

Agriculture also contributed to the services-sector recovery. The agriculture sector expanded 2.2 percent during H1-FY26, supported mainly by livestock growth and better-than-expected rice and sugarcane output despite flood-related disruptions.

The report noted that improved performance in commodity-producing sectors supported transportation, wholesale trade and rural commercial activity.

Macroeconomic stabilisation also played an important role in supporting services-sector growth.

Lower inflation, exchange-rate stability and easing borrowing costs improved business and consumer confidence during the review period.

Average inflation declined to 5.2 percent during H1-FY26 from 7.2 percent in the corresponding period last year, while the SBP reduced the policy rate by a cumulative 1,150 basis points between June 2024 and December 2025.

The report said improving purchasing power and lower financing costs helped revive domestic demand across several segments of the economy.

Labour-market indicators also showed signs of recovery.

According to the SBP, online and newspaper job postings increased in recent months, while business confidence surveys indicated optimism regarding future employment generation.

However, the report noted that information and communication services remained relatively weak compared with other service categories during H1-FY26.

The broader services outlook remains tied to overall economic momentum and external-sector stability.

The SBP warned that geopolitical tensions and higher oil prices could affect transportation costs, consumer demand and business activity during the second half of FY26.

The war in the Middle East has already increased uncertainty regarding global trade flows, freight charges and energy markets.

The report projected GDP growth for FY26 within the range of 3.75 percent to 4.75 percent, with agriculture and industry expected to continue supporting services activity.

The SBP stressed that deeper structural reforms and sustained macroeconomic stability remain essential for maintaining growth momentum across the economy.

Credit: INP-WealthPk