By Staff Reporter
KARACHI: Pakistan’s macroeconomic stability strengthened in the first half of fiscal 2026 despite floods at home and uncertainty over global trade even as the State Bank of Pakistan warned Tuesday that the war in the Middle East now threatens to derail the recovery.
The central bank in its half-year review of the economy said the war in the Middle East poses “significant risks to the macroeconomic outlook” through potential supply-chain disruptions that could hit inflation, external trade, remittance inflows and overall economic activity.
The SBP’s State of Pakistan’s Economy: Half Year Report 2025-26 shows real gross domestic product expanded 3.8 percent in the first six months of the fiscal year — twice the pace of the same period a year earlier. The pickup was led by industrial activity, followed by services and agriculture. Momentum in output translated into a volume-driven rise in imports, while a sharp drop in rice shipments pulled down export earnings.
Steadily rising workers’ remittances helped finance much of the deficits in the trade, services and primary-income balances, keeping the current-account gap at moderate levels. On the fiscal side, a substantial reduction in interest payments combined with consolidation efforts produced an overall budget surplus in the first half — the first since fiscal 2002 — while the primary surplus held steady at the previous year’s level.
Inflation moderated further. The national consumer-price index averaged 5.2 percent in the first half, about two percentage points below the year-earlier reading. The central bank attributed the cooling to a continued prudent policy mix, an improved external position, a stable exchange rate, softer international commodity prices and downward adjustments in administered electricity tariffs. “These outcomes were supported by prudent monetary and fiscal policies, ongoing structural reforms, favourable commodity prices and the IMF programme,” the report said.
The SBP in particular maintained a cautious monetary stance that kept real interest rates adequately positive on a forward-looking basis. The central bank noted that high-frequency indicators — including the purchasing managers’ index, large-scale manufacturing and construction — pointed to sustained momentum through February before the Middle East conflict began to weigh on output in the final month of the fiscal year.
As a result, the SBP now projects full-year real GDP growth close to the lower end of its earlier forecast range of 3.75 percent to 4.75 percent. Despite stronger activity and higher commodity prices, the current-account deficit is also seen near the bottom of the previously projected 0 percent to 1 percent of GDP range.
The outlook for inflation is less benign. A surge in international oil prices and knock-on effects on other commodities are expected to keep national CPI inflation above the upper bound of the medium-term target range of 5 percent to 7 percent for most of fiscal 2027.The report added that the spike in energy prices, together with higher insurance and freight charges, will inflate the import bill and freight-service payments. The government’s decision to pass through higher oil costs to domestic energy prices, along with energy-conservation measures, is likely to curb demand and limit import volumes. A decline in liquefied-natural-gas imports should provide additional relief.
On the export side, shipments are expected to remain weak because of slower global growth, persistently low rice prices, the closure of Pakistan’s western border and the realignment of global trade flows triggered by tariff adjustments. Workers’ remittances from Gulf Cooperation Council countries — which accounted for about 55 percent of total inflows between fiscal 2021 and 2025 — may come under pressure in the fourth quarter, the SBP said. Even so, remittances are still projected to stay strong for the full year, helping to offset some of the widening in the trade deficit.
The report highlighted that Pakistan’s transition to a sustainable high-growth path with lasting macroeconomic stability will require deep-rooted structural reforms. It singled out long-standing weaknesses: low savings and investment, weak competitiveness, declining exports, subdued foreign direct investment and a persistently low tax-to-GDP ratio. A separate chapter on climate change underscored the country’s vulnerability. Although Pakistan contributes very little to global greenhouse-gas emissions, it ranks as the 15th-most affected nation by climate events.
The country faces high levels of exposure to climate risks combined with low preparedness, which “enhances the risks to the country’s economy,” the report said. Pakistan’s relatively high emissions intensity of GDP reflects structural inefficiencies and a carbon-intensive growth model. Substantial investment in mitigation and adaptation is required, yet international climate finance inflows remain low and domestic public and private financing faces significant constraints.
The central bank’s assessment comes after last week’s expressions of optimism from both the Ministry of Finance and the SBP about meeting growth, fiscal and current-account targets despite the regional crisis. In April, Governor Jameel Ahmad said the economy is “relatively better positioned than during previous crises” to handle the new risks and heightened uncertainty introduced by the conflict.
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