War toll on economy

All of the economic gains of recent years, including the hard-won macroeconomic stability, could be erased if the situation in the Middle East continues to deteriorate. The SBP's latest half-yearly report, 'The State of Pakistan's Economy 2025-26', illustrates how all of the difficult economic repair work is being held hostage by the US-Iran War and its global economic fallout.

The data in the report for the first half of the fiscal year suggests the country was on track to grow at a reasonable rate of 3.8% - though still relatively low for an emerging economy. Even critics would find it hard to dispute the numbers. Industrial output rose sharply and inflation eased significantly while the SBP's foreign exchange purchases and net financial inflows steadily rebuilt external buffers. Fiscal consolidation also remained on track, with the first budget surplus since FY2002. Independent analysts had noted that this surplus was proof that economic problems were being treated with real solutions, rather than smoke and mirrors. Unfortunately, the SBP report is explicit when it says that since February 2026, the war has "posed significant risks to the macroeconomic outlook", already shifting growth projections to 3.75%, or the lower end of its opening estimated range.

A new wave of austerity triggered by the global spike in oil prices is going to have a negative impact to last well beyond the eventual end of the war, as citizens struggle to make ends meet due to rising prices and supply shortages caused by shipping disruptions. And despite the clawbacks, the war is feared to devastate forex reserves, mere months after it looked like we were on track to stop depending on 'life-saving' loans from IFIs. Economic planners now have the unenviable task of figuring out how to keep the economy from falling apart without repeating the painful measures of a few years earlier, when the government almost completely lost its ability to invest in public welfare and social services. It will be critical to avoid extreme measures and instead build a path toward stability that reduces harm to the poor, even if it is at the cost of growth.