The State Bank of Pakistan (SBP) on Tuesday warned of significant risks to the country’s economic outlook due to the Middle East conflict, saying increased energy prices and supply chain disruptions can weigh on macroeconomics.
In its Half Year Report 2025-26, the central bank said Pakistan’s macroeconomic stability strengthened in the first half of the fiscal year despite global uncertainty. However, it noted, “increases in energy prices, the supply chain disruptions, and increase in freight charges and insurance premium could significantly weigh” on the country’s macroeconomic outlook during the second half of fiscal year 2026.
The SBP said the surge in international energy prices had immediately transmitted to domestic inflation despite the government’s decision to initially absorb a majority of the increase. However, it added, it did not expect it to have a significant impact on overall economic activity.
The central bank said it expected real GDP growth to remain close to the lower bound of the projected range of 3.75-4.75%. It said that the increase in production of food crops and limited export opportunities due to regional conflicts are also likely to moderate food inflation. However, it said, energy inflation is set to increase in light of the government passing onto citizens the surge in international oil prices. “Oil price shocks also pose significant upside risks to core inflation via increased cost pressures, second-round effects and inflation expectations,” it warned.
Inflation
On inflation, the report said national CPI is likely to remain above the upper bound of the medium-term target range of 5-7% in the remaining months of FY26 and in FY27. It said the energy prices and increased insurance and freight charges would also likely inflate Pakistan’s import bill and freight service payments. Amidst this, it said, higher fuel prices and ongoing fuel conservation measures would likely help contain domestic demand and reduce energy import volumes. Additionally, the central bank expected a decline in LNG imports to reduce energy imports.
At the same time, the bank said it expected exports to remain weak amidst slower global economic growth, multi-year low rice prices, closure of Pakistan’s western border, and realignment of global trade flows due to ongoing tariff adjustments. It warned that the prevailing global conditions would likely impact workers’ remittances in the fourth quarter of FY26 as remittances from Gulf Cooperation Council (GCC) countries contributed around 55% of total remittances between FY21 and FY25.
The report projects the current account deficit in FY26 to remain close to the lower bound of 0-1% of GDP.
According to the report, the energy price surge has implications for tax and non-tax revenue, and the government’s discretionary spending. “In particular, the adjustment in domestic fuel prices vis-à-vis a surge in global oil prices is likely to increase energy subsidies. Moreover, the PDL collection may also be impacted due to reduced POL sales (volume effect) following the increase in POL prices and implementation of energy conservation measures,” it said.
The government’s decision to reduce the development budget could somewhat cushion the impact, it said, while projecting a fiscal deficit of 3.5-4.5% of GDP.
The central bank said it expected the lingering impacts of war on supply chain resumption and global economic activity to pose significant challenges to macroeconomic stability over the medium-term, despite the near-term outlook looking broadly stable.