Pakistan’s macroeconomic outlook for the ongoing fiscal year has improved relative to the Monetary Policy Committee’s earlier assessment after the outbreak of the Middle East conflict, but threats persist from both external and domestic sources, according to the State Bank of Pakistan (SBP)’s biannual Monetary Policy Report.
According to the report, inflation is projected to be lower than previously anticipated, economic activity is expected to recover gradually, and the external account pressures are assessed to remain moderate, with FX reserves targeted to increase further. However, it warns, the baseline outlook remains subject to multiple evolving short- and medium-term risks from both external and domestic sources, particularly the Middle East conflict, adverse climate events, global tariff policies, and delays in the implementation of structural reforms.
The report cities geopolitical developments as the “most important” near-term external risk, referring to surging oil prices followed renewed hostilities between Iran and the United States. “The duration and intensity of the conflict remain the key determinants of its impact on the global and domestic economy,” it said, adding climate-related risks, including from El Niño, warrant careful monitoring. Such adverse weather conditions, it said, could affect agricultural production and food inflation, potentially necessitating higher imports and lower food exports, placing additional pressure on the external account.
The central bank also cited evolving global tariff policies as posing a risk to the macroeconomic outlook. The process of global trade realignment remains underway, it said, with implications for global supply chains, trade patterns, and export competitiveness across countries. For Pakistan, these developments present both opportunities and challenges. While trade diversion may create opportunities for some export sectors to expand market share in destination markets, Pakistan already operates in a challenging export environment characterized by intense competition from regional peers, particularly in textiles and food products.
Consequently, it said, weaker global demand and intensifying competition from regional exporters could limit these gains. The net impact would depend on the pace of global trade normalization, the relative tariff treatment of Pakistan’s exports, and the ability of domestic firms to respond to evolving global market conditions and improve competitiveness.
The MPR noted improvement in Pakistan’s macroeconomic stability over the past two years provides an opportunity to accelerate the structural reforms needed to sustain higher economic growth and reduce macroeconomic vulnerabilities. This has become even more important in the wake of recurring supply shocks over the past few years. In particular, continued fiscal reforms remain essential to broaden the tax base, improve revenue mobilization and support the government’s objective of maintaining primary fiscal surpluses over the medium term. Given Pakistan’s relatively low tax-to-GDP ratio compared to many peer economies, expanding the tax base while reducing distortions and providing greater incentives for productive and export-oriented sectors would help strengthen fiscal sustainability.
At the same time, Pakistan’s exports remain low relative to the size of the economy, leaving the external sector susceptible to adverse movements in global commodity prices and tariff developments in key destinations. In this regard, the government is taking measures to support export-oriented sectors, including performance-based rebates and other incentives for exporters. However, for a sustainable pickup in exports, structural reforms aimed at improving the business environment and reducing reliance on imported energy are essential to enhance firm productivity and export competitiveness, which will support a more sustainable export-led growth model.
On inflation, the central bank said its medium-term risk profile depended on trends in global energy and food prices, including those stemming from the Middle East conflict and El Niño’s possible impact on agricultural prices and the external account.
In sum, managing these risks requires prudent macroeconomic policies, stressed the MPC. The current policy mix—characterized by fiscal prudence, positive forward-looking real interest rates, and improved FX reserves—has enhanced the economy’s resilience to near-term macroeconomic vulnerabilities.
At the same time, this will need to be complemented by expediting structural reforms aimed at enhancing productivity, expanding and diversifying exports as well as export markets, and broadening the tax base. Continued progress in these areas will be essential for further strengthening resilience and creating conditions for higher and sustainable economic growth.